IRS Releases Rollover Guidelines

For many people, a 401(k) offers a way to save money for retirement. Last year was the first year that people under the retirement age were allowed to rollover investments into an IRA account. The IRS has issued guidelines to employers whose 401(k) plans offer Roth accounts rollovers for contributors younger then retirement age.

The key part that governs the rollovers for participants under the retirement age of 59 ½, is how the rollover occurs. Participants can only rollover money into an IRA account directly, and because the distribution of funds is not allowed, the 60-day rule does not apply.

The IRS is allowing time for the sponsors of such plans to amend their plans to allow rollovers. The amendments must be made by December 31, 2014. This time can also be used to allow sponsors to have participants elect to have salary deferrals into their Roth.

The IRS advises sponsors on the following to make the process simpler and easier to implement:

  • Restrict the types of contribution and eligible balances for Roth rollovers. This can help avoid the burden of tracking all the distributions for some or all of the Roth balances.
  • Have a clause where sponsors can eliminate the in-plan rollover at any time as long as it does not discriminate in favor of highly compensated employees.
  • Favorable tax treatment only applies to Roth distributions made after five years front eh date the Roth was established.