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quinta-feira, 9 de dezembro de 2010

#NEWS : Roth Conversions In 401(k)s For Real In 2010

Personal Finance

Roth Conversions In 401(k)s For Real In 2010

Dec. 9 2010 -
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Poof! Turn your 401(k) into a Roth 401(k). It’s actually happening. Employees are starting to act on a new law that allows you to redesignate money stashed in your traditional 401(k) into Roth money, keeping the money in your existing 401(k). But there’s a tight window to do so for 2010. At Fidelity Investments, for example, account holders have from Dec. 1 to Dec. 23 to make the move. The deadline to make a Roth in-plan rollover at Charles Schwab is Dec. 20, and at Vanguard it’s Dec. 29.

The biggest catch this year: your employer has to offer the option. At Fidelity, only 260 employer plans out of 4,000 plans that have a Roth 401(k) option are allowing in-plan conversions this calendar year. At Vanguard, only two dozen out of 2,500 plans it administers are offering the conversion option for 2010.

One reason for the slow uptick is that the Internal Revenue Service didn’t release basic guidance on how this all works until late November. (The law that allows this was tucked into the $30 billion Small Business Jobs Act that Pres. Barrack Obama signed in late September.)

With Roth conversions, you pay tax now to save taxes later. The Roth 401(k) in-plan conversion appeals to a slightly different group of folks than the much-ballyhooed Roth conversion where you convert all or part of a traditional IRA or a 401(k) to a new Roth IRA. That move is touted by advisors who say you can better control your retirement nest egg in a Roth IRA than if you leave it in your employer 401(k) plan, especially an old employer’s plan. For help deciding if a Roth IRA conversion strategy fits your needs, click here.

Reasons you might want to keep your retirement nest egg in your 401(k) by doing an in-plan conversion include access to lower-fee institutional class funds, and for better creditor protection. A 401(k) plan, governed under ERISA, is an asset protection safe haven.

In the case of the Roth 401(k) in-plan conversion, the amount you can convert is limited to the amount that your employer permits as a distribution (even though the money isn’t distributed but stays in the plan). This will vary among employers, but is typically your vested balance once you reach 59 and a half or retirement age. You can convert employer match money at an earlier age, says Barry Picker, a CPA in Brooklyn, N.Y. And you can convert amounts left in a plan of a previous employer at any age (assuming the employer offers the option). For more on how to Rothify an old 401(k), click here.

The Roth 401(k) in-plan conversion has other limitations. For one, you still have to take required payouts from the Roth 401(k) like you do with a regular 401(k) and a traditional IRA. Also, with the Roth 401(k) in-plan conversion, you don’t have the ability to “redo” the conversion (and tax bill) if you change your mind or your investments tank like you do with a conversion to a Roth IRA. For more on how this “redo” backsides game with the IRS works, click here.

The IRS guidance did shed light on some big questions. For example, normally when you take a distribution from a 401(k), the employer has to withhold 20% for taxes, but this rule is waived for in-plan conversions. Also, surviving spouses can do in-plan conversions.

This isn’t a move to be made without tax advice and thought. There may be a reason not to move company stock in a 401(k) to a Roth 401(k) because you could get better tax treatment under “net unrealized appreciation” rules, warns Joseph Adams, an employee benefits lawyer with McDermott, Will & Emery in Chicago. He says a lot of big employers and record keepers felt it was too late to offer the in-plan conversion option this year. But he expects many more will do so next year.

Why rush to do this by year-end? If you do a conversion in 2010, you’ll have the choice to pay the taxes due in April 2010, or split the tax over the next two tax years. “The tax split is the key driver this year,” says Beth McHugh, a vice president with Fidelity. You don’t have to make your choice on the tax treatment of the conversion until next April. For more on how the Bema tax deal would sweeten Roth conversions, click here.


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