Home  >  Financial Articles and Q&A  >  As I see it, I would benefit from having my retirement...

As I see it, I would benefit from having my retirement accounts in Roth type accounts, which is easily done with my IRA. My question is, can I (by my own actions) convert my current 401K into a Roth 401K, while still working for the same company. My inquiries through my HR dept tell me the Co. has n

May 17, 2013 by jack from Mapleton, MN in  |  Flag
3 Answers  |  5 Followers
Follow Question
2 votes

Hi Jack! I'm a fan of Roth 401(k) plans, so I can see why you would want to do this. You have already taken the first step in contacting your HR group. It sounds like your company retirement plan does not allow a conversion, so you have to abide by the plan rules. However, if your company does offer a Roth 401(k) type of plan in addition to a regular 401(k), you should be able to discontinue contributions to the regular plan and begin designating any new contributions to the Roth 401(k). While this does not impact the savings in your current account, you can make a change so that going forward, your contributions will grow tax-free and be tax-free upon withdrawal.

2 Comments   |  Flag   |  May 17, 2013 from River Hills, SC
Ryan

I wouldn't rush into this decision lightly. If you're a younger investor, an allocation to a Roth 401(k) may be a wise decision. If you are near or at your peak earning years, a Roth 401(k) likely isn't in your best interest. Make sure that you look at your tax profile now and what you believe you will need in retirement. Compare the taxability of both income streams and if your current situation seems less tax advantaged (than in retirement) then you should continue to invest in the traditional 401(k).

2 likes | 
Flag |  May 17, 2013 near Pittsburgh, PA
Pam Horack, CFP®

Thanks, Ryan. What I see as well is that older adults who are now taking IRA and 401(k) disbursements according to the IRS required minimum distributions sometimes have to take out so much that a percentage of their Social Security is being taxed. This doesn't happen with Roth withdrawals, so it's a tricky balance.

2 likes | 
Flag |  May 17, 2013 near River Hills, SC

1|600 characters needed characters left
0 votes

Jack, there are 2 points to consider. the first is if your employer offers a Roth, and the second is if they will allow a conversion.

I have trouble believing that your employer does not offer a Roth option. To this point, you should be able to easily direct future contributions to a separate Roth 401k account.

As to being able to convert your current traditional 401(k) account to a Roth; the HR person you spoke to may or may not be knowledgeable on this subject....he or she really may or may not have even understood what you are trying to do. I would direct that question to the plan administrator. Their contact info should be on your statement. If not, just call HR and ask for their phone number. The plan administrator is the one who would execute such a conversion.

You mentioned not paying more taxes. Keep in mind that if you participate in a Roth, the monies going in will be taxed as ordinary income, regardless of whether it is new contributions or a conversion.. And you mentioned early withdrawal or distribution fees. You should not see any, except, as you mentioned a possible custodian maintenance fee.

Comment   |  Flag   |  May 17, 2013 from Delray Beach, FL

1|600 characters needed characters left
0 votes
Rich Winer Level 20

IRS laws now allow you to do a Roth conversion from a 401K to a Roth 401K, but only if your plan has a Roth 401K option AND allows you to do the conversion. Current statistics show that more than half of all plans will NOT allow you to convert. You will need to check with you HR department or the plan provider. I like the Roth IRA even for people in their peak earning years. Considering the fiscal condition of the government, I think there's a high probability that most people's tax rates will be same or higher in retirement. Also, I think traditional iRAs are a better deal for the IRS than for the individual. I would rather forgo a tax deduction on $2,000 today in exchange for the ability to receive $2,000 or $3,000 tomorrow tax-free. But, I would still consult with your CPA and financial advisor before doing a conversion. They may know if reason why you would be better off not converting.

1 Comment   |  Flag   |  May 17, 2013 from Woodland Hills, CA
Rich Winer

Correction: I meant that I would rather forgo a $2,000 tax deduction today in exchange for the ability to receive $4,000 or $6,000 tomorrow tax-free. I wish Brightscope would add a way to correct typographical errors after we have already posted.

1 like | 
Flag |  May 17, 2013 near Woodland Hills, CA

1|600 characters needed characters left