There has been a lot of news recently on the ability of people to convert their traditional IRA accounts to Roth IRA accounts following legislation that removed income limits caps. But under current law, there is no ability for an investor in an employer-sponsored 401(k) account to make such a conversion to a Roth accounts within the same plan. Now, there are reports that the Senate is going to propose rules that overturn this law and allow certain employees to roll over amounts from their 401k retirement plans to a Roth-type savings account. The provision is part of a package of small business and savings incentives and could be tabled later this week.

The new provision would allow the roll-over of amounts in a 401(k) retirement plan of otherwise permissible distributions, to a Roth-type account in the same plan. It would help employees who are 59 1/2 years old or older, and who want to keep their savings in their current retirement plan but would like to convert it to a Roth-type account for tax savings/minimization during retirement. Participants in a tax-deferred 401(k) are allowed to take distributions beginning at age 59 1/2, but need to pay taxes on distributions taken. Under a Roth IRA plan, taxes are paid on monies when contributed but all gains and principal are tax free on withdrawal.

Details of the Senate small business bill have not yet been released, but a draft copy of the bill was obtained by Dow Jones Newswires. The tax provisions of the bill were negotiated in a bipartisan fashion between Sens. Max Baucus (D., Mont.) and Charles Grassley (R., Iowa), the chairman and ranking Republican respectively on the Senate Finance Committee. The Roth roll-over provision would raise $5.1 billion to help pay for roughly $12 billion in tax incentives aimed at spurring small business growth. The Roth provision is scored as a revenue gainer in the 10-year budget window, because people taking advantage of the conversion will owe taxes on tax-deferred amounts that had been accumulating in their 401(k) plans.

I will continue to monitor the status of this provision/bill’s approval through Congress and will update with new information. I encourage you to subscribe (free) via Email or RSS to get the latest updates.