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Focus on Benefit Plans: Provisions of New Tax Legislation Affect Qualified Retirement Plans

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On January 1, 2013, the Senate and House of Representatives passed the American Taxpayer Relief Act.
January 4, 2013

On January 1, 2013, the Senate and House of Representatives passed the American Taxpayer Relief Act.

The recently approved measures to avoid the fiscal cliff have resulted in not only changes to personal income tax rates and other taxes, but to certain provisions applicable to qualified retirement plans as well.

Under previous law, 401(k) plans, 403(b) plans and 457(b) governmental plans were permitted to contain Roth accounts within a retirement plan whereby participants could defer compensation into the retirement plan on an after-tax basis.

However, converting pre-tax contributions in the same retirement plan to an in-plan Roth balance within these plans was only permitted in select instances. Those instances were limited to: a change of employers, retirement, or reaching age 59 and ½.

Under the new recently passed legislation, any amount in a non-Roth account may be converted at any time to a Roth account in the same plan, whether or not the amount is distributable. The amount converted would be subject to regular income tax in the year of conversion. Subsequent to the conversion, any amount distributed from the Roth account within the retirement plan, including both contributions and earnings, would be tax-free.

Plan documents will need to be amended to affect this new opportunity for in-plan Roth conversions. Several logistical questions have arisen in relation to these new in-plan Roth conversions, and future guidance is expected from both the U.S. Treasury and IRS regarding these questions.

Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.

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