Small Business Jobs Act of 2010: New Roth Conversions For Retirement Plans

The Small Business Jobs Act of 2010 (the “Act”), signed into law on September 27, 2010, permits pre-tax accounts in certain cases to be converted to Roth (after-tax) accounts within a retirement plan. This applies to 401(k) and 403(b) plans now and, beginning in 2011, to 457(b) retirement plans. Employers must soon decide whether they want to amend their plans to allow for the conversion.

Employers who sponsor 401(k) and 403(b) plans may design their plans so that participants can elect to make Roth deferrals. Roth deferrals are after-tax contributions, but qualified distributions from Roth accounts are tax-free. Significantly, all of the earnings compounded on the Roth deferrals are not taxable. Because of the tax benefits, Roth accounts have gained wide popularity since their enactment.