(b)lines Ask the Experts – Can Existing 403(b) Balances be Converted to a Roth 403(b)?

March 23, 2010 (PLANSPONSOR (b)lines) – A plan sponsor says: "One of my employees has indicated that recently passed legislation would permit her to convert her existing 403(b) balance to a Roth. We have a Roth 403(b) account in our plan. Can this be done?"

Michael A. Webb,Vice President, Retirement Plan Services, Cammack LaRhette Consulting, and David Levine, Groom Law Group, Chartered answer:  

Unfortunately, at this time, the employee cannot convert the pre-tax 403(b) account balance to a Roth. For the uninitiated, a Roth 403(b) works in the opposite manner of a traditional 403(b) from a tax perspective. In a traditional 403(b), contributions are not taxed, but the 403(b) account balance is fully taxable when withdrawn. In a Roth 403(b), contributions are taxed, but the 403(b) account balance is not taxed at all when withdrawn, provided that certain conditions are met (such as a five year holding period and distributions after certain events).  

As for your employee’s confusion, there have indeed been bills introduced in the past few years that would permit plan participants to convert their existing 401(k) balances to a Roth 401(k); and changes in 401(k) regulations often make their way to the 403(b) world as well. For example, legislation to allow the conversion of distributable 401(k) and 403(b) balances (most commonly some or all of a participant’s account balance after he or she attains age 59 1/2) was recently approved by the Senate.  However, as of this writing, no legislation to allow the conversion of existing 403(b) balances to a Roth 403(b) has been signed into law.  

As a result, currently, the only method of converting a traditional 403(b) account to a Roth is to convert it to a Roth IRA. However, in order to move any 403(b) account balances to an IRA account, a participant must be eligible to receive a distribution, which could then be rolled over to a Roth IRA. Since we are dealing with an active employee here, she is likely not eligible to receive a distribution from the plan. There are exceptions: if the plan permits in-service distributions of certain employer contributions (a rare event), or if the employee is age 59 1/2 and the plan permits age 59 1/2 in-service withdrawals, a conversion of a traditional 403(b) account balance to a Roth IRA would be possible.  

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.