In-plan Roth rollovers and transfers

When it comes to planning and saving for your future, your retirement plan offers you a variety of options and opportunities. For 401(k), 403(b) or governmental 457(b) Plans, these options may include an in-plan Roth rollover of non-distributable amounts (sometimes referred to as “transfers”) and an in-plan Roth rollover of distributable amounts. If you are thinking about an in-plan Roth rollover or transfer, you should be aware that these transactions can change the tax treatment of your investment earnings and withdrawals.

What are the general characteristics of each of these transactions?

Both of these transactions convert non-Roth amounts to designated Roth amounts in your account. Once converted, these amounts receive the benefits of Roth treatment under Internal Revenue Code rules. The key difference between these two transactions is that an in-plan Roth rollover of distributable amounts (IPR rollover) converts amounts that are currently available to you for distribution, while an in-plan Roth transfer (IPR transfer) converts amounts that are not currently available to you for distribution.

An IPR rollover of distributable amounts converts amounts from non-Roth sources to the designated Roth source in your account. This is vested money that is available for distribution and is rollover eligible. Because this transaction is based on a distributable event, it is considered a distribution and would trigger a Special Tax Notice to you that explains the tax consequences of this transaction. This transaction must be permitted under your employer’s Plan.

An IPR transfer of non-distributable amounts permits you to convert some or all of your non-Roth vested balance, which is not currently available for distribution, to your designated Roth account within your retirement savings Plan. Your employer’s plan document must permit (and, for governmental plan sponsors, state/local law must authorize) this feature and also must allow ongoing designated Roth contributions. Since a transfer is not based on a distributable event, the Special Tax Notice does not apply to this transaction.

For example, if you are a participant in a 401(k) plan, distributable events typically would include reaching age 59½, normal retirement age, or severance from employment (hardship withdrawals are not permitted to be rolled over).

If one of these distributions is available under your employer’s Plan, and you are eligible, you may request an IPR rollover to convert the distributable non-Roth amounts to a designated Roth account under the Plan. If you are not eligible for any of these distributable events, you may request an IPR transfer to convert non-Roth amounts to your designated Roth account. If you have both amounts that are distributable and amounts that are not distributable, you may request both transactions, as permitted under your employer’s Plan.

Your plan document will determine whether an IPR rollover of distributable amounts and an IPR transfer of non-distributable amounts are permitted under the Plan, as well as which contribution types may be converted into a designated Roth account under the Plan, and how frequently those can occur. Note that outstanding loan balances cannot be included in an IPR rollover or IPR transfer. Amounts invested in a Self-Directed Brokerage Account must be transferred to core funds before being included in an IPR rollover or IPR transfer.

What are the federal tax consequences of these two transactions?

In the year in which either of these transactions occurs, the pre-tax amount of the IPR rollover or IPR transfer including any earnings, must be reported as taxable income for federal income tax. If the IPR rollover or IPR transfer consists of any nonRoth after-tax amounts, those amounts are not subject to federal income taxation.

Taxes will not be withheld when either of these transactions is processed; however, individuals who make an IPR transfer or IPR rollover may need to increase their federal withholding or make estimated tax payments to avoid an underpayment penalty. You are strongly urged to consult with an accountant and/or tax advisor regarding the federal and, if applicable, state and local income tax implications before making your final decision and in the completion of an IPR transfer or IPR rollover. These two transactions have income tax implications and once processed, they are irrevocable and cannot be reversed.

Who is eligible to do an IPR transfer or IPR rollover?

Participants and surviving spouse beneficiaries and alternate payees who are current or former spouses maintaining accounts under the Plan can request an IPR transfer or IPR rollover.

If your Plan requires spousal consent for distributions, will spousal consent be required for an IPR transfer or IPR rollover?

No. Even if your Plan requires spousal consent for distributions, spousal consent is not required for an IPR transfer or IPR rollover because no cash is being distributed from your account.

When are amounts included in an IPR transfer or IPR rollover available for distribution?

Your ability to withdraw an IPR transfer will depend on the Plan’s distribution rules. That is, the same reasons for distribution that applied to the amounts prior to the IPR transfer or IPR rollover will continue to apply after the transfer or rollover is completed. However, amounts that are IPR rollovers will be placed in a rollover account and are available for distribution when the Plan permits distributions from rollover amounts. In addition, qualified distributions from a designated Roth contribution account are generally free from federal income taxes.

• A qualified distribution from a Roth account is one that is taken after:
  the death of the participant, the participant’s becoming disabled, or upon the participant reaching age 59½ AND
• is taken after the five consecutive taxable year period beginning in the taxable year when the first Roth contribution is made to the participant’s Roth account, and ends on the last day of the fifth taxable year.

Any distribution taken before these conditions are met would require the taxation of the earnings on that amount. If the withdrawal of an IPR transfer or IPR rollover is not a qualified distribution, you’re subject to an IRS 10% premature distribution penalty tax on the taxable amount attributable to the IPR transfer or IPR rollover. Please note: The 10% premature distribution penalty tax would not apply to either 457(b) contributions or rollovers from other governmental 457(b) plans that are part of either an IPR transfer or IPR rollover under a governmental 457(b) plan.

Beginning in 2024, designated Roth contributions, including IPR transfers and IPR rollovers, are excluded from the calculation for the Required Minimum Distribution (RMD) during a participant’s lifetime. The designated Roth contributions are included in the calculation for the RMD taken by a beneficiary.

How can you request an IPR transfer or IPR rollover or get additional information about these transactions?

Voya® can provide you with the appropriate contact and phone information to request an IPR transfer or IPR rollover or get additional information about these transactions. Before requesting either of these transactions, determine whether an IPR transfer or IPR rollover is appropriate for you.