The last-minute deal by Congress to avoid the fiscal cliff contains a new option for workers saving for retirement.
The budget legislation allows 401(k) participants to convert any amount of money in their plan to a Roth 401(k), if such a plan is offered by their employer. The money, taxed at the time of conversion, can then be withdrawn tax-free at the time of retirement. The Joint Committee on Taxation estimates $12 billion in revenue will be raised by 2022 as a result.
Bloomberg reports the conversion opportunity "can benefit people with significant balances, the up-front money to pay taxes now with funds outside their retirement account and years of tax-free earnings ahead of them or their heirs. Conversions to Roth 401(k)s had been limited to certain funds and to plans that allowed the switches. The law opens the opportunity to more workers who hold $5 trillion in employer-sponsored defined contribution plans including 401(k)s."
Michael Kitces, director of financial planning with Pinnacle Advisory Group in Columbia, Md, and AdvisorOne contributor, wrote in his blog on Jan. 1, "The reason this provision is notable is that, under current law, you can only convert a 401(k) plan if you are eligible to take a distribution from the plan (whether it's going to a Roth 401(k) or Roth IRA), which generally means you have to be 59 1/2, dead, disabled, or separated from service, unless the plan allows in-service withdrawals.
"The new ATRA provision will allow an intra-plan Roth conversion, regardless of whether you're eligible for a distribution out of the plan (the way you would have to be to get to a Roth IRA). Notably, the rules appear to allow the new intra-plan Roth conversions for 401(k), 403(b), and 457 plans."
Basically, he continues, the new rule simply means a plan participant can now do intra-plan 401(k) (or 403(b) or 457 plan) conversions from traditional to Roth in the same manner you can do so for IRAs.
