![]() So far, the conversion rate has been slow. Roth 401(k) conversions have been allowed since September 2010, and about half of employers offer the option. Roth 401(k) accounts, however, are subject to the standard RMD requirements, although you can address this problem by rolling over your account to a Roth IRA when you hit age 70. Roth IRAs have no required minimum distributions (RMDs) after age 70½ - a terrific feature that can help you control your tax burden in retirement and even pass along assets to your heirs tax-free (though heirs would have to deal with RMD requirements). “If you have a choice, the re-characterization feature puts the IRA conversion ahead of the Roth 401(k).” “Think of it as a hierarchy of conversions,” says Kevin O’Fee, vice president of defined-contribution product management at Fidelity Investments. ![]() That means the Roth IRA conversion will be a more attractive option for most people. “You get the hindsight benefit not just on your planning but on the investment decision.” “It’s an important benefit you get in converting to a Roth IRA,” says Kaye Thomas, a tax attorney and author of several books on taxes and investing. “Re-characterization” allows you to reverse the conversion and send the assets back to your traditional IRA.īut the Roth 401(k) conversion does not include a re-characterization feature. If you convert IRA assets that subsequently fall in value, you still owe taxes on the amount of the original conversion. Roth IRAs feature a nifty “take-back” feature that allows you to undo conversions that don’t work out. However, a conversion, with a plan for continued Roth contributions, would be a good fit for younger workers in lower tax brackets who want to protect themselves against possible future higher marginal tax rates, or for wealthy folks who don’t expect to be in lower brackets in retirement. Roths are less advantageous for those who expect to be in a lower tax bracket in retirement. The relative advantages and disadvantages depend on your tax situation and outlook. But even if your employer decides to offer the new Roth conversion option, it will come with some drawbacks that should give you pause. The option to use Roths inside workplace plans has been gaining ground, mostly because Roth accounts offer powerful long-term tax benefits - for some savers. But the Roth provision really is an accounting gimmick, since it merely accelerates payment of taxes the government would otherwise get down the road when account holders take distributions in retirement.Īnd the benefit to retirement savers? That’s more complicated. The Roth 401(k) expansion is projected to generate $12.2 billion over 10 years, because income tax is due in the year of conversion from a qualified account. In theory, conversions will generate income tax revenue, and Congress needed to find some to get the fiscal cliff deal done. What do Roth conversions have to do with the fiscal cliff? Very little. Previously, conversions could be done only by savers who also were eligible to take a distribution from the plan - in most cases, people age 59½ or older. The law permits all retirement savers to convert existing 401(k) retirement plan assets to a Roth 401(k), so long as their plan offers Roth options and adds the conversion feature. As part of the American Taxpayer Relief Act of 2012, Congress made it possible for all retirement savers to convert their 401(k) accounts to a Roth 401(k) without moving money out of the workplace plan. CHICAGO (Reuters) - It was a small but important line item in the recent “fiscal cliff” deal.
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