Now that the fiscal cliff deal lets 401(k) participants convert their pretax savings into a Roth IRA plan, advisors have an opportunity to guide retirement plan sponsors through the complexities of the American Taxpayer Relief Act.
In a "Rethinking the Roth" webinar last week, 401(k) expert Bob Kaplan of ING urged retirement plan advisors to grow their business by showing sponsors how plan participants can now convert pretax dollars to an after-tax Roth account. Sponsors may not yet realize that the tax act opens up Roth conversions to a broad range of plan participants, Kaplan said.
"A lot of advisors I talk to downplay the Roth, saying people don't want it. But anytime there's talk about taxes going up, people want to consider it. What a great opportunity to demonstrate your value," said Kaplan, ING U.S.'s national retirement consultant and 401(k) technical expert. "A lot of young people have started to do the Roth conversion, so don't assume you know which employees want to do it. We've seen across-the-board participation in all ages and income levels."
Demonstrating value to plan sponsors
The House and Senate approved the fiscal cliff deal on Jan. 1, and President Barack Obama signed the Taxpayer Relief Act into law immediately after the vote. The legislation sets out a new rule allowing 401(k) participants to complete intraplan Roth conversions if the employer offers designated Roth accounts under the plan, regardless of whether the individual is allowed to take a distribution out of the plan, according to financial planning guru Michael Kitces. The transaction, Kitces said, will be taxed in a similar manner to any other Roth conversion.
An advisor can demonstrate his or her value to a sponsor by showing how the new tax act allows a plan to be amended to allow in-plan conversions, Kaplan said, adding that such amendments are voluntary and not required by law.
"If a plan already has a Roth deferral feature, focus on tax diversification," he suggested. "If a plan does not have the Roth deferral feature, talk with the plan sponsor about adding it."
Roth contributions are typically most appropriate for younger, lower-income workers, Kaplan continued, while Roth conversions tend to benefit older and higher-income workers who anticipate higher tax rates in the future. Using the Roth for estate planning purposes may provide heirs with tax-free income, he said.
