If your employer offers a traditional 401(k) retirement plan, you may want to ask if there are plans to also offer the Roth 401(k), and the option of converting a traditional pre-tax plan to a Roth plan. The new American Taxpayer Relief Act (aka Fiscal Cliff Deal) expands eligibility for these conversions, and, depending upon your circumstances, paying the tax now just might be financially savvy in the long-term.
Clearly, Congress is hoping to raise some revenue by allowing these taxable conversions. And while it may seem counter-intuitive to pay the tax now, there are situations in which a 401(k) Roth conversion makes sense. Here’s how it works: the new rules basically let you convert everything in a traditional 401(k), including pre-tax salary deferrals, at any age, into a Roth 401(k). You pay income tax on the amount you convert. Your new Roth account continues to grow tax free and the eventual distributions also are tax free. According to Forbes, “a Roth conversion makes sense if you expect your tax rate to be the same or higher in retirement and won’t need the funds for a decade or more. It’s also an attractive way to leave an income-tax-free inheritance to your kids or grandkids.”
As with all tax and retirement planning strategies, there are a few caveats:
- Unlike the traditional IRA Roth conversion rules, there is no option to split your tax bill over two years. You will owe the entire tax on whatever amount you convert (remember, Congress is trying to raise some revenue here!).
- Also unlike traditional IRA Roth conversions, you cannot un-do your conversion next year if you change your mind. Your 401(k) conversion is permanent.
- Both the Roth 401(k) plan and the conversion option must be included in your employer’s plan offering for you to take advantage of this strategy.
Forbes has a handy online slide show outlining 10 reasons you might want to convert to a Roth IRA. If any of these fit your situation, be sure to consult with a qualified Financial Advisor/retirement planning and tax specialist before making a move.
Have you or your elderly loved ones got your affairs in order by updating your Will and Trust so that your home and cash assets are protected from Medicaid and nursing home liens? There has been many changes in laws that may have impacted your estate plan. Call us for a review!
To register for a free estate planning workshop at the learning center go here: http://www.myfamilylifeplan.com/workshops-Registration-Form.php
If you have any questions or would like to schedule a consultation please call Attorney Patrick Kelleher at 781-871-PLAN (7526) or by email at Pat@myfamilylifeplan.com
Our firm helps families taking care of them for life. We not only “create” their Will and Trust, but we “maintain it and keep it updated” for them throughout their life! The meter is not running for our ‘Client Care Plan’ members!
Patrick J. Kelleher is a South Shore, MA resident and estate planning attorney serving and protecting families and businesses in the South Shore, MA area. For more information on estate planning visit our firm’s website at www.MyFamilyLifePlan.com where you can check out our Blog, free Newsletter library, free Estate Planning Channel on Youtube and sign up for a Free e-Newsletter!
Also serving the following communities South of Boston; Quincy, Milton, Braintree, Randolph, Holbrook, Weymouth, Scituate, Norwell, Hingham, Cohasset, Hull, Hanover, Pembroke, Duxbury, Marshfield, Plymouth, Rockland, Hanson, Halifax, Plympton, Carver, Abington, Whitman, Kingston
This article is not intended to provide legal or tax advice or create or imply an attorney-client relationship. No information contained herein is a substitute for a personal consultation with an attorney.
Circular 230 Disclosure: To comply with IRS regulations, we advise you that any discussion of Federal tax issues in this e-mail was not intended or written to be used, and cannot be used by you, (i) to avoid any penalties imposed under the Internal Revenue Code or (ii) to promote, market or recommend to another party any transaction or matter addressed herein.
Reference: Forbes (January 2, 2013), “Roth 401(K) Conversions For All Thanks To Fiscal Cliff Deal”