Hottest retirement plan improvement in 2013?
By Robert C. Lawton
Many employer plan sponsors are expressing a high level of interest in adding Roth 401(k) in-plan conversions as an option to their 401(k) plans in 2013. The recently passed Taxpayer Relief Act of 2012 made it possible for retirement plan participants to convert existing 401(k) plan balances to Roth 401(k) balances, whether or not the participant is distribution eligible.
The benefits? All contributions and earnings that have been in the plan five years after the Roth clock starts are distributable tax free (assuming they are distributed due to an eligible event).
The cost? It is necessary to pay taxes on any 401(k) balances converted into Roth 401(k) balances in the year of conversion.
The logic of executing a Roth 401(k) in-plan conversion lies in a belief that tax rates are low now and will be higher in the future. If a participant believes that is true, it may make sense to pay taxes now on retirement plan balances.
Younger individuals just starting their careers may find this option valuable. Imagine building a nest egg over a 40-year career and having your entire 401(k) account balance available tax-free at your retirement! This option may also appeal to higher balance, older individuals who may be involved in tax planning, or individuals who are looking for additional taxable income in a particular year (e.g.: due to the realization of a loss).
There appears to be no downside associated with adding this option to a 401(k) plan. It will not cost anything additional to administer each year and is a nice option to have available for employees to elect.