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Evaluating a Roth 401(k) or Roth 403(b) Conversion

Posted by Andrew Chan  December 1, 2010 05:05 PM

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The Small Business Jobs Act of 2010 that was enacted into law in late September includes a provision that allows certain 401(k) and 403(b) plan participants the ability to convert their 401(k) and 403(b) assets to a Roth 401(k) or Roth 403(b) account. In addition, if the conversion is done in 2010, the payment of the taxes due on any of the converted amounts can be deferred until 2011 and 2012. This is the same benefit offered to those who are converting their Traditional IRAs to Roth IRAs in 2010.

While this seems like a great benefit for those looking to turn their future retirement distributions into tax-free distributions, the following criteria need to be satisfied to convert to a Roth 401(k) or Roth 403(b).

1) The participant’s existing 401(k) or 403(b) plan needs to include a Roth option as part of the plan itself. While many employers have been adding this option to their plans since its introduction in 2006, many others have not. Be sure to check with your employer to see if their plan offers the option to set up a Roth account.

2) If your employer offers a Roth option, you will need to check to see if they offer the ability to do a Roth conversion (or if they plan to offer this option) within their existing plan. Under the Small Business Jobs Act of 2010, employers have the option but are not required to offer the conversion provision.

3) If your employer’s plan offers a Roth option and you are allowed to do a Roth conversion within their plan, you will need to make sure that you are eligible to take a distribution from your plan. Plan participants are not generally allowed to take distributions from their 401(k) or 403(b) plans without satisfying certain criteria set out by the employer’s plan. Each employer will have different criteria for determining who is eligible for a distribution, so be sure to check with your employer to see what criteria need to be satisfied.

Regardless of whether or not you are considering a Roth conversion from your Traditional IRA or your 401(k)/403(b) account you should answer the following questions as they apply to your specific financial situation:

* What are the advantages and disadvantages of doing a Roth conversion?
* How much should I convert?
* How will I pay the taxes owed on the conversion (if any)?
* Can I offset the taxes owed on the conversion with other circumstances within my tax situation?
* Should I pay the taxes owed on the conversion in 2010 or defer them until 2011 and 2012?

This blog is not written or edited by Boston.com or the Boston Globe.
The author is solely responsible for the content.

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D. Abraham Ringer is a CERTIFIED FINANCIAL PLANNER practitioner and a Financial Adviser with Morgan Stanley Global Wealth Management in Boston. He is registered in MA, NH, NY and several other states to which his articles are directed. For more information please visit www.morganstanleyfa.com/ringer
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