Hello Striegel Knobloch & - Here Are Your Articles for Wednesday, August 07, 2019
Is this email not displaying correctly?
View it in your browser .
Our Website Accounting Services Tax Services Client Portal About Our Firm Contact Us
Share Save

Converting a Regular 401(k) to a Roth 401(k)


Most people have heard of Roth IRAs, but many people do not know that a Roth version of the 401(k) plan is available as well. Although this type of account became permanent in 2006 with the Pension Protection Act, not every company that offers a standard 401(k) also offers a Roth version. If your company isn't offering one yet, you might consider asking whether they will, because this option can benefit a lot of employees.

Tax Implications

When it comes to taxes, a Roth 401(k) works much like a Roth IRA. It's all about when you pay those taxes. With a Roth 401(k), you contribute to the plan with after-tax dollars, so you don't owe taxes when you start taking distributions. If there is an employee match, however, those funds are usually contributed pre-tax, as with a standard 401(k). As such, you will have to pay tax on the matching portion at distribution.

The Conversion Question

Under certain circumstances, you can convert a regular IRA to a Roth IRA. Is the same true about 401(k) plans? The answer is yes — sometimes.

First, you have to make sure your company allows conversions. If it does and you go through with it, you'll owe income tax on the amount you're converting from a tax-deferred 401(k) to a post-tax investment Roth 401(k). You will need advice to accurately calculate the tax hit you'll take in the year of the conversion, but you can estimate this on your own. For example, if you're in the 24% marginal tax bracket, just multiply the amount you're converting by 24%. And try to pay for the conversion with cash outside your retirement account.

You have until you file your taxes to come up with the cash, but once those taxes are paid, you won't have to worry about them later. Finally, note that each company that allows a conversion may have its own particular procedures.

Is Conversion Right for You?

Choosing between a traditional or Roth 401(k) hinges on your current and future tax rate. If you expect that your tax rate is going to be higher in retirement, consider the Roth 401(k). If you think that your tax rate will be lower in retirement, consider a traditional pre-tax 401(k). The challenge with this choice is that it's hard to predict what your future tax rate will be.

You don't have to make an either/or decision. You may choose to be tax-diversified by funding both types of accounts and you'll have tax flexibility today and in the future. So, if you decide a Roth 401(k) is a good fit, convert a portion of your regular 401(k) account balance to jump-start your Roth strategy.

A Roth 401(k) conversion can be a good move, but it is not necessarily right for everyone. Careful analysis is necessary.

Share Save

Your Comments

Striegel Knobloch & Co LLC
Saved Articles
Comments and Feedback
Refer A Friend
Your Privacy
Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
Powered by
Copyright © IndustryNewsletters All rights reserved.

This email was sent to: trg@skco.net

Mailing address: 115 W Jefferson St # 200, Bloomington, IL 61701