Tax Treatment of Rollover Distributions From Section 401(k), 403(b), or 457(b) Plans

Federal Tax Treatment

The Small Business Jobs Act of 2010 (P.L.111-240, enacted September 27, 2010) provides that certain retirement plan distributions may be rolled over into a designated Roth account. Under the provisions of this Act, if a section 401(k) plan or section 403(b) plan has a designated Roth account, employees may be able to roll over distributions from their account into the designated Roth account under the plan. This provision is effective for transfers after September 27, 2010. This Act also provides that a governmental section 457(b) plan may be amended to add a designated Roth account and to allow rollovers to that designated Roth account. This provision is effective for taxable years beginning in 2011.

In the case of a permitted rollover contribution to a designated Roth account, the person must include the distribution in gross income (subject to basis recovery). Persons who make the rollover in 2010 may postpone payment of tax on the rollover amount until they file their 2011and 2012 income tax returns. Half of the taxable amount would be included in 2011 gross income and half in 2012 gross income.

Wisconsin Tax Treatment

As of this date (October 12, 2010), Wisconsin has not adopted the provisions of federal P.L. 111-240. Until Wisconsin adopts P.L. 111-240, persons who make the rollover from a section 401(k) plan or a section 403(b) plan to a designated Roth account in 2010 or thereafter (or from a governmental section 457(b) plan to a designated Roth account in 2011), will have a different tax treatment for federal and state income tax purposes.

Because Wisconsin has not adopted the provisions of P.L. 111-240, the tax on any 2010 rollover amount will be due with the 2010 Wisconsin income tax return. The election to postpone payment of tax until the 2011 and 2012 income tax returns is not available for Wisconsin.

If the person is under age 59 1/2, the person would be subject to an early distribution penalty on the taxable amount. The penalty is equal to 3.33% of the taxable amount of the rollover distribution. The person would also be subject to a 2% penalty for an excess contribution to the designated Roth account. This penalty would be applied each year until the excess contribution is withdrawn. Persons age 59 1/2 or over would only be subject to the excess contribution penalty.

The department will publish further guidance on this issue if P.L. 111-240 is adopted in the next legislative session that begins in January 2011.

Last updated November 12, 2010