KnowHow Archive

Plan Sponsor Guide Participant Guide

Over Roth?

On September 27, 2010, President Barack Obama signed the "Small Business Jobs and Credit Act of 2010," which allows the taxable transfer of a participant’s contributed pre-tax money to an in-plan Roth option. Prior to that legislative change, a participant who wanted to convert to a Roth had to do it outside his workplace retirement plan to a Roth IRA.

Illustration by Victo Ngai

Last year, 18.8% of respondents to PLANSPONSOR’s annual Defined Contribution Survey offered the option (more than 26% of large programs did) and, this year, more than one in five do (as do more than a third of the largest programs). Of course, even when offered the opportunity, just 5.0% of participants, on median, take advantage of the option.

However, the expanded in-plan option—not to mention a growing sense that current tax rates are lower than they will be in the future—seems likely to encourage some employers who have held off on offering a Roth feature to add it.

Beyond the in-plan conversion opportunity (note that your plan not only must have the Roth option, but also must provide a withdrawal option necessary to allow the conversion), there is a special short-term window that allows participants who make the conversion in 2010 to spread the taxation of that conversion across 2010 and 2011 reporting years. Please also bear in mind that the legislative history accompanying the new law says that a plan must be amended in order to allow these in-plan Roth conversions (though the time frame for doing so is not yet clear), and that your plan’s current withdrawal provisions also might require amendment in order to accommodate this option.

This month’s Know How does not deal with conversion issues; rather, it focuses on some of the pros and cons of the Roth option for participants on a longer-term basis, while providing a frame of reference with current 401(k) and Roth IRA choices.

As always, we look forward to your comments and suggestions.

A recent issue of Employee Plans News from the IRS has additional information at

Nevin E. Adams