In general, the ability to convert is more beneficial to younger savers years from retirement because they have a longer time to recoup the amount paid in current taxes.
-John Vogler, senior analyst for retirement research, Invesco
This entry is the second of a two-part series covering in-plan conversions to the increasingly popular Roth option.
In Part 1, I cited a recent Aon Hewitt survey indicating many employers are considering adding a Roth option to their retirement plans. In this second part, I’ll explore who might want to consider taking advantage of this conversion opportunity.
Conversion basics
- Roth 401(k)s are relatively new, with only about half of employers currently offering them, although the number is rising. Less than 20% of employees who have been offered Roth 401(k) accounts have one.
- The strategy is much like converting a traditional pretax IRA to a Roth IRA, a move some taxpayers make if they think it’s worth paying taxes at today’s historically low rates rather than later.
- You pay income tax on the amount you convert — the 10% early withdrawal penalty doesn’t apply to the conversion amount.
- The Roth grows tax free, and qualified distributions are tax free.
- The new rules became effective Jan. 1, 2013, but you can transfer amounts contributed to pretax accounts in 2012 and earlier.
- A Roth conversion may make sense if you expect your tax rate to be the same or higher in retirement, and you won’t need the funds for a decade or more.
- In general, the ability to convert is more beneficial to younger savers years from retirement because they have a longer time to recoup the amount paid in current taxes.
