With the new opportunities for plan participants to convert previously non-distributable funds into a Roth under the American Taxpayer Relief Act, there may be a rush to offer this option — currently about half of plans now make a Roth available. But rather than rush it, advisors may want to counsel their clients to wait until further guidance is issued, and be cautious about how to handle these conversions until the law is settled.
Issues that advisors should be aware of, according to the law firm of Davis Wright Tremaine, include:
• Until there is further guidance, plans should track distributable and otherwise non-distributable funds.
• Funds outside the plan may have to be used to pay the taxes due on the conversion.
• Non-vested participants may want to wait before paying taxes on monies that may be forfeited.
• Look for clarification of the rules governing distributions post-conversion.
Since the law is permanent and not just a window of opportunity that plans will lose out on by not acting quickly, Davis Wright recommends caution and patience. Sound advice.
