A provision in a 2010 law allowed some 401(k) participants to convert part of the money in their plan to a Roth 401(k) account, with restrictions: Their employer had to offer a Roth 401(k) and allow conversions. Funds transferred were limited to money eligible for distribution, such as that held by savers age 59½ and older, and some employer contributions, said Alison Borland, vice president of retirement solutions and strategies at Lincolnshire, Illinois-based Aon Hewitt. It is a unit of Aon Plc that administers 401(k) plans for about 5 million workers.

“Now they are saying you can convert any money,” said Ed Ferrigno, vice president of Washington affairs for the Plan Sponsor Council of America. The Chicago-based group represents about 1,000 employers that sponsor plans and lobbied for the 2010 law change as another way for participants to diversify their savings, Ferrigno said. The budget legislation may encourage more employers to offer Roth 401(k) accounts, even as questions remain about the logistics, he said.

Plan Guidance

“This isn’t going to happen overnight,” he said. “Treasury is going to have to issue guidance. Plans are going to have to make amendments.”

Americans held $5 trillion in defined contribution plans as of Sept. 30, including $3.5 trillion in 401(k)s, according to the Washington-based Investment Company Institute.

About 12 percent of plan sponsors offer and allow conversions to Roth 401(k) accounts and the majority of them don’t charge a fee for it, Borland said. Participants should ask whether there’s a cost for such a transaction, she said.

A taxpayer in the top income bracket with a 401(k) worth $1 million may pay 39.6 percent, or $396,000, in federal taxes this year when converting the entire account into a Roth 401(k). The legislation allows all or a portion of funds in an account to be converted to a Roth within the same plan, Olivieri said. Once the taxes are paid upfront, all of the additional earnings and appreciation in the account are tax-free, he said.

Congress has turned to Roth accounts before as a revenue raiser.

The government lifted income restrictions on converting an individual retirement account, or IRA, under a provision of a 2006 law that took effect in 2010. That’s when U.S. taxpayers making more than $100,000 a year in adjusted income could start making the transfers. There’s no limit on conversions if an investor has multiple IRAs, nor a cap on the amount that can be shifted.

Fidelity, Vanguard