Conversion of 401(k) to Roth
originally posted: 11/22/2006 reposted: 2/18/2011 This post has not been recently reviewed or revised by the author and may be out of date. If you notice an error or are in doubt, please send a new question by email or ask for an update. Email asktony@tonynovak.com.
Q: My employer is planning to add the “Roth” after-tax investing option to our 401(k) plan. Is there any provision that will allow before-tax 401(k) contributions to convert to Roth 401(k) if the taxes are paid for the funds we want to convert? I believe that it is allowable to convert from traditional IRAs to Roth IRAs, but I have not heard enough about Roth 401(k)s to know if it is allowed. If it is allowed, what are the limitations or conditions (e.g. income limits, can only convert $xxxx per year, etc.)?
A: There are two separate issues here; first the provisions allowed (or soon to be allowed) under the 401(k) plan that will be fully described in the plan documents. It is important to realize that not all options allowed by the IRS and Department of Labor are incorporated into all 401(k) plans. Many are available at the option and under the terms elected by the employer so we cannot address these here. The employer should presumably be working with a plan adviser like Freedom Benefits for this purpose. The second issue relates to individuals who have effective control of assets in an IRA. The IRS will soon allow for conversions of regular 401(k)s to IRA-based plans through distributions or conversions and will also allow for more liberal conversion of regular IRAs to Roth IRAs. The consensus of financial adviser opinion is that the Roth conversions will not be terribly popular anyway, so there is no point in getting into detail here. You may wish to first develop a more detailed tax planning strategy that minimizes your taxes over the long term. In the larger picture, you are likely to find that this strategy would not be your best option.
Summary
More resources:
www.freedombenefits.org