Tuesday, January 8, 2013

Did anyone notice this?

Apparently, the fiscal cliff deal included a provision to allow existing traditional 401(k) accounts to be converted to Roth 401(k)'s.  Like the traditional IRA conversion, which allows people who exceed income limits for contributing to a Roth IRA directly to back-door fund Roth IRA's by contributing to traditional IRA plans and then converting them into a Roth IRA, taxes on the traditional IRA are paid up front, and then future growth is tax-free.

You can read the details here.  As always, the caveat is that a Roth isn't appropriate for everyone:  It makes sense primarily for individuals who expect their retirement incomes to be higher than their working incomes.  In addition, the benefits are skewed towards the younger generation in that longer time horizons until the retirement mean more opportunity to take advantage of the power of compounding.

I've put this on the list for things to ask my accountant about at tax time. My employer has offered a Roth 401(k) for several years, and just under 50% of my 401(k) is already in Roth accounts.  My traditional 401(k) has close to $200,000 in it and the tax bite will be a big one, certainly five figures.  Before doing any kind of a conversion (which isn't available yet anyway), I need to be sure it makes sense.  Hopefully the decision will be a lot clearer for other people!

1 retort:

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