In particular, the American Society of Pension Professionals and Actuaries (ASPPA) requested that the Internal Revenue Service (IRS) issue guidance confirming that the five-year period of participation required for a tax-free distribution from a Roth account that was created by an internal Roth conversion begins on the first day of the calendar year that contains the date of the conversion or, if earlier, the date of the first designated Roth contribution to the plan.
In a comment letter, ASPPA explained that Internal Revenue Code Section 402A specifies that a distribution from a designated Roth account is “qualified” and not subject to income tax only if it is made following a five-taxable-year aging period (the “Nonexclusion Period”). A fair reading of the statute and Congressional intent would indicate that the Nonexclusion Period for amounts internally rolled-over to a Roth account begins on January 1 of the year that the In-Plan Roth Rollover (IRR) contribution was made.
However, ASPPA noted, an informal IRS response to a question at the 2011 ASPPA Annual Conference reached a contrary result on the basis that a rollover is not a contribution for purposes of starting the Nonexclusion Period.
The letter contends that Congress’ recent passage of the American Taxpayer Relief Act of 2012, effectively expanding the availability of in-plan Roth conversions by allowing for such conversions with respect to non-Roth funds that are not currently distributable (see “The Increased Availability of Roth In-Plan Conversions”), provides further support that the intent of Congress is to freely permit and encourage conversions.
“Guidance affirming that the five-year aging period for a qualified distribution begins on the first day of the calendar year in which the IRR was contributed or ‘converted’ within the plan would be consistent with this and further Congressional intent,” the letter says.
The letter is here.