In Plan Roth Conversion for 401(k) and 403(b)

In Plan Roth Conversion for 401(k) and 403(b) September 30, 2010

A new law passed by President Obama this week allows eligible employees participating in their company’s 401(k) or 403(b) to convert a portion of their funds into ROTH.   This rule is great for those who want to maintain their employer retirement account instead of rolling it into a ROTH IRA.  (In my opinion, an IRA is more flexible than an employer retirement account, but we’re just covering the facts on this new change)

The new in plan ROTH conversion law applies only to retirement plans that adopt the provision in their plan rules.  As an employer, you’ll need to contact your plan administrator to find out the steps to add this amendment to your plan.

Who is eligible?

  • If you are over age 59 ½  (and your plan approves it) you can convert funds into ROTH.
  • If you have a 401(k) or 403(b) from a previous employer that is still in the plan, (and the plan approves it) you can convert the funds to ROTH.
  • If you meet one of the two provisions above, you can also convert assets that have been rolled into the plan – as long as the funds have been kept separate within the current plan.

Is it beneficial to do an in-plan ROTH conversion?

If you enjoy the convenience of participating in an employer 401(k) or 403(b) and do not care to expand your investment options beyond what is offered in the plan, the in-plan ROTH conversion might be a good option.  The reason someone might do a ROTH conversion may be that:

1. They’re expecting to be in a higher tax bracket in the future.

2. You have at least five years or more to invest (in order to take advantage of ROTH tax free distributions, your fund must be invested at least five years)

3. They can afford to pay the taxes now with cash outside the retirement account (essentially increasing the value of your retirement account)

Other options you should consider…

Having ROTH funds in your portfolio is an excellent way to plan for retirement.  Instead of rushing to the hype of converting all your funds into ROTH, look at your current tax situation and consider staring a ROTH IRA.  With ROTH IRAs, you have greater flexibility for investing funds as well as receiving your principal without being tied to an employer’s plan rules.

Before you go through any ROTH conversion, be sure to contact your tax preparer to see how that affects your individual situation.  Since this is a new law, we may hear about updates in the next few weeks.  Feel free to add comments about any changes or your opinion about converting funds to ROTH.

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