Lesser Known “Fiscal Cliff” Outcome: Conversion to Roth 401(k) is Easier

By Equity Trust Staff0 Comments

It’s been hard to turn on the news in the past few weeks without hearing blow-by-blow accounts of the last-minute maneuvering in Washington to avoid the “Fiscal Cliff.” While most of the news has revolved around the preservation of tax cuts and the retaining of funding to other government programs, some might not be aware of the changes to government-sponsored retirement accounts that came out of the deal. One rule shift might interest those looking for more options when it comes to preparing a nest egg.

A recent Forbes article explains that the government is allowing people in traditional 401(k) plans to move existing money in the plan to a Roth 401(k) without requiring a “distributable event” to occur (age 59½, retirement, or a job change).
The new rules basically let you convert everything in a traditional 401(k), including pre-tax salary deferrals, at any age, into a Roth 401(k). “They’re opening up in a major way the assets you hold that can be converted,” says Ed Ferrigno, vice president, Washington affairs, with the Profit Sharing Council of America.
Of course, those who convert to a Roth 401(k) are still (susceptible) to the conversion tax, but benefits of converting to the Roth 401(k), like a Roth IRA, include the elimination of taxes on qualified distributions down the road.

Sources in the Forbes article surmise that more employers will begin to make the Roth 401(k) available as an option to employees. A Roth Solo 401(k) is also available, which carries no income limits.