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An in-plan Roth rollover (IPRR) is effective for distributions from Internal Revenue Code Section 401(k) plans and IRC Section 403(b) plans made after Sept. 27, 2010 and for distributions from IRC Section 457(b) plans for taxable years beginning after 2010. [superscript]1But a taxpayer needs to consider certain factors before deciding whether an IPRR makes sense. Here are the rules on IPRRs and the key points to consider in determining whether an IPRR is the most attractive option for your client.
IPRR Fundamentals
Here are the basics:
What is it? An IPRR is an eligible rollover distribution from an individual's plan account, other than a designated "Roth account," that's rolled over to the individual's Roth account in the same plan, pursuant to IRC Section 402A(c)(4).
Who can make an IPRR? A plan participant, a surviving spouse beneficiary or an alternate payee who's a spouse or former spouse of the plan participant may make an IPRR. Nonspouse beneficiaries aren't eligible to make an IPRR. [superscript]2A plan must have a qualified Roth contribution program in place when a rollover contribution to a Roth account is made. [superscript]3A plan isn't required to offer IPRRs.
What plans? An IPRR can be made in Sections 401(k), 403(b) and 457(b) [superscript]4plans that have adopted qualified Roth contribution programs if the plan so allows. The plan distribution rules apply, including the required minimum distribution (RMD) rules. RMD rules don't apply to Roth individual retirement accounts during the owner's lifetime.
What does it cost? The recipient must include the fair market value (FMV) of the IPRR reduced by any basis in gross income. For payments from a plan in 2010 that were rolled over to a Roth account in the plan (and that aren't distributed from that account until after 2011), the rollover is taxed one-half in 2011 and one-half in 2012, unless the recipient elects to be taxed on the entire amount in 2010. This result is the same if the rollover were made to a Roth IRA.
An IPRR is a revenue raiser . [superscript]5The Joint Committee on Taxation Report for the Small Business Jobs Act of 2010 estimated the budget effects of allowing IPRRs at $5.099 billion for the period from 2011 through 2220. The budget effect of expanding IPRRs...