The recently enacted 2010 Small Business Jobs Act includes a wide-ranging assortment of tax breaks and incentives for small business. Paying for the tax breaks, in large part, are new provisions allowing taxpayers to convert 401(k) and government retirement accounts into Roth accounts, in which they pay taxes up front on the money they contribute, enabling them to withdraw it tax-free after they retire.

Advocates of the new provisions argued that the changes would increase flexibility in retirement preparation, while generating immediate revenue for the government. There is also a provision permitting partial annuitization of nonqualified annuity contracts. Here are the details.

Participants in governmental 457 plans allowed to treat elective deferrals as designated Roth contributions. For tax years beginning after Dec. 31, 2010, the new law will allow retirement savings plans sponsored by state and local governments (governmental 457(b) plans) to include designated Roth accounts. Contributions to Roth accounts are made on an after-tax basis, but distributions of both principal and earnings are generally tax-free.

Distributions from elective deferral plans may be rolled over to designated Roth accounts. The new law allows 401(k), 403(b), and governmental 457(b) plans to permit participants to roll over their pre-tax account balances into a designated Roth account. The amount of the rollover will be includible in taxable income except to the extent it is the return of after-tax contributions. If the rollover is made in 2010, the participant can elect to pay the tax in 2011 and 2012. Plans will be able to allow these rollovers immediately upon the Act's enactment.

Nonqualified annuity contracts. The new law permits holders of nonqualified annuities (annuity contracts held outside of a qualified retirement plan or IRA) to elect to receive part of the contract in the form of a stream of annuity payments, leaving the remainder of the contract to accumulate income on a tax-deferred basis. The annuity payments must be for a period of 10 years or more, or during one or more lives.

We hope this information is helpful. If you would like more details about any aspect of the new legislation, please do not hesitate to contact us.