3787 / What rules apply to Roth 401(k) rollovers?

Since 2013, funds from traditional 401(k) accounts may be rolled over into Roth 401(k) accounts without a penalty tax (even if they are not otherwise distributable without penalty).

The amount that a plan participant can roll over is not limited. Any amount rolled over pursuant to this provision is treated as a distribution that was contributed in a qualified rollover contribution within the meaning of IRC Section 408A. This provision applies to 401(k) plans, 403(b) plans and governmental 457(b) plans.¹

As under prior law, the amount that is rolled over from a traditional 401(k) into a Roth 401(k) is included in gross income. The taxable amount of the Roth rollover must be included in the participant’s gross income. The taxable amount of an in-plan Roth rollover is the amount that would be includible in a participant’s gross income if the rollover were made to a Roth IRA. This amount is equal to the fair market value of the distribution reduced by any basis the participant has in the distribution.² The taxable amount of a distribution that an individual rolls over in an in-plan Roth rollover generally is includible in gross income in the taxable year in which the rollover occurs.

The expanded rollover treatment is optional, so that plan administrators have discretion as to whether to adopt an amendment permitting expanded use of this type of rollover. The amendment must be made no later than the last day of the first plan year in which the amendment is to be effective.

See Q 3789 for distribution restrictions that apply following a 401(k) to Roth 401(k) rollover.