A retirement services trade group is encouraging employers to think about the implications before using a new 401(k) and 403(b) plan Roth conversion law.

The SPARK Institute, Simsbury, Conn., has put out an alert warning sponsors against rushing to permit Roth conversions.

Participants in a traditional plan deduct contributions from taxable income today but may have to pay taxes on withdrawals later, if their retirement income is high enough that they end up paying income taxes.

Participants who have Roth plan accounts must pay income taxes today on the cash they are contributing to the plan. The government says it will let participants who retire take withdrawals free from future income tax payment requirements.

In 2010 and 2011, the government will let participants pay income taxes on the assets in existing 401(k) plan or 403(b) plan accounts and convert the accounts into Roth accounts.

The law was passed in late September and took effect immediately.

But the Internal Revenue Service and its parent, the U.S. Treasury Department, have not yet resolved important questions, such as whether the distribution portion of the conversion is subject to the mandatory 20% withholding requirement on distributions, the SPARK Institute says.

Regulators also have to tell sponsors whether they must track the conversion amounts, and, if so, how, and whether they can add Roth accounts to existing plans, the institute says.

If plan participants can roll assets into Roth individual retirement accounts (IRAs), then use of Roth IRA rollovers may be a better option in 2010 than encouraging in-plan Roth conversions, the institute says.

- Allison Bell