By easing the rules regarding conversions of 401(k), 403(b), and similar retirement plans, Congress hopes to encourage taxpayers to roll over their taxable retirement funds into nontaxable Roth IRAs. Under current law, taxpayers can only roll their 401(k) plans into Roth IRAs for specific reasons, such as a job change, retirement, or reaching 59-1/2. The new deal eases those restrictions, with the hope that more taxpayers would make the move.
Since rolling a 401(k) into a Roth is a taxable event, the looser rules are expected to generate immediate federal revenue. Congress wants to offset some of the $24 billion lost because of a two-month delay in the big federal spending cuts across the board that the "fiscal cliff" would have enforced beginning Jan. 1. But it's a short-term revenue boost at the expense of long-term tax revenues that would come from 401(k) funds, which accumulate tax-free but are taxable once they're withdrawn from the account.