In-Plan Roth Conversions – Convert It While You Work

Go Roth or go home!

If you’re like me,  you probably don’t enjoy paying taxes.

If you’re in the minority and do; I suggest you take your temperature and head directly to the emergency room because something ain’t right with you.  I digress…..

By now, hopefully you’ve jumped on the Roth IRA bandwagon.   Me? I’ve drank from the Roth IRA Kool-Aid and I’m loving it.  The thought of tax free money later in life gives me the chills.  (Okay, maybe I need my temperature checked.)

The only downside to the Roth IRA is that there are certain income restrictions.   One way to get around this is to utilize a Roth 401k.  Only problem there is that your employer might not offer it.

Many people loved the Roth IRA conversion event in 2010 that allowed them to convert existing IRA’s and old retirement  accounts to Roth’s.   Regarding your retirement accounts, the only problem there is that you could only convert the “old” ones.   Your existing plans had to stay put.  That is until recently….

In-Plan Conversion in Effect

Big news for participants in 401(k), 403(b) and 457 retirement plans. The Small Business Jobs Act of 2010 contained an interesting sidelight concerning employer-sponsored retirement plans. Some of these retirement plans are now allowing in-plan Roth conversions. This means:

You may be able to “convert” a portion of the pre-tax dollars you have saved to after-tax dollars without having to arrange a rollover to a Roth IRA. You may even be able to “go Roth” in 2010, which will allow you the chance to optionally split the taxable income resulting from the Roth conversion across the 2011 and 2012 tax years. That tax break is scheduled to sunset at the end of this year.

In-Plan Roth Conversion Eligibility

Are you eligible for this opportunity? Not everyone is. Before you plan to arrange this Roth conversion, you must meet certain conditions:

  • You must be older than 59½, or
  • You must have assets in a 401(k) or 403(b) account at a previous employer that could potentially be rolled over to your current employer’s plan.
  • Alternately, you could roll assets from a previous employer’s plan that are now held in your present employer’s plan (as long as they are being held separately) or do a Roth conversion of distributions from a defunct defined-benefit pension plan that have been rolled over into your 401(k) or 403(b) plan.

In order for you to do this, your employer’s retirement plan also has to meet a certain condition. The plan document has to allow after-tax Roth contributions. In 2010, only about a third of employers have plans that allow the Roth 401(k) option – but that may increase with this new development.

Are you state employee with a 457(b) plan and feel left out? Don’t. Starting this year, Roth accounts will be available in these type of retirement plans.

So what are you waiting for?   Go to your HR department and find out if your plan administrator offers the in-plan Roth conversion.

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