One of the last provisions included in the 2012 American Taxpayer Relief Act eliminated some of the limitations on Roth 401(k) conversions. Previously, as part of 2010 tax legislation, you could convert your 401(k) to a Roth 401(k). However, you had to be eligible for a distribution, so the rules essentially prevented conversions for those younger than 59½. With the 2012 laws, it opened the eligibility to all plan participants.
For you to be able to convert, the language that permits Roth 401(k) deferrals must be included in your 401(k) plan. As a result of the last-minute legislation, many plans are unprepared for this option. It is likely very few will be able to take advantage of this provision in 2013.
Primarily, this was done as a revenue generator, because part of the conversion process is paying the taxes now on the funds you convert. Investors who take advantage of the conversion are working on the assumption that their account will continue to grow so significantly tax free that it overcomes the tax burden a conversion creates today. You must have the cash in an account outside the 401(k) to pay the taxes that will be due as a result of the conversion.
If your circumstances are on target with outside cash, it can make economic sense. Perhaps, if you are young and have little assets contributed to your 401(k) plan; as an estate-planning tool; the beneficiaries of the plan are young children, or perhaps you expect to be in a higher tax bracket in retirement, a Roth 401(k) conversion may work. If you believe this may benefit you, we strongly encourage you to sit with a financial adviser and have the numbers run to see if it is beneficial to pay the taxes today to enjoy the tax-free growth of the account. We ran several scenarios for our clients, and for most, it did not make financial sense for them.
At Henssler Financial we believe you should Live Ready, which includes understanding if it is in your best interest to take advantage of the benefits available under current tax laws. If you have questions regarding your 401(k), the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
