Ask the Experts January 25, 2011

(b)lines Ask the Experts – Eligibility for Roth Conversion

January 25, 2011 (PLANSPONSOR (b)lines) – “I am a senior executive at a nonprofit and was excited to hear about the new rules that would permit me to convert my Traditional pretax 403(b) account to a Roth 403(b). However, my HR department is informing me that I am ineligible for such a conversion; is this correct?”

Reported by

Michael A. Webb, Vice President, Retirement Plan Services, Cammack LaRhette Consulting, answers:

Assuming you are under age 59 1/2, unfortunately your HR department may indeed be correct. As part of the Small Business Jobs Act of 2010 that was passed last fall, employers were permitted to amend their 403(b) plan to permit Traditional to Roth 403(b) conversions. However the language of the legislation limits such conversions to “eligible rollover distributions”.

An “eligible rollover distribution”, by definition, is a distribution. Thus, a participant must be eligible to receive a distribution from the plan in order to convert from a Traditional 403(b) to a Roth 403(b). Since you are currently employed, it is quite likely that your plan does not permit distributions while employed until you reach age 59 1/2 (except in the case of hardship, but a hardship distribution is NOT an eligible rollover distribution; some plans also permit certain annuity contract distributions as soon as after two years of participation in the plan, but this is relatively rare). Thus, active employees, including yourself, are generally not eligible for the Traditional to Roth 403(b) conversion.

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.