Budget Deal Lets More Savers Convert to Roth 401(k)s

Legislation could encourage more employers to offer Roth accounts.

U.S. workers willing to take tax pain today in exchange for tax-free gains on earnings in their 401(k) retirement accounts later have a new avenue to do so.

The budget legislation passed by Congress Jan. 1 lets 401(k) participants convert any money in their tax-deferred accounts to a so-called Roth 401(k) account, if their employer offers one, which can be withdrawn tax-free in retirement. The change is projected to raise $12.2 billion in revenue over 10 years, according to the Joint Committee on Taxation, and help defray the cost of delaying spending cuts that had been set to take effect this month.

Fund Transfers

A provision in a 2010 law allowed some 401(k) participants to convert part of the money in their plan to a Roth 401(k) account, with restrictions: Their employer had to offer a Roth 401(k) and allow conversions. Funds transferred were limited to money eligible for distribution, such as that held by savers age 59½ and older, and some employer contributions, said Alison Borland, vice president of retirement solutions and strategies at Lincolnshire, Illinois-based Aon Hewitt. It is a unit of Aon Plc that administers 401(k) plans for about 5 million workers.

Fidelity, Vanguard

When the Roth IRA conversion rules changed, Internal Revenue Service regulations allowed taxpayers to choose whether to pay all the tax in 2010, or split it between tax years 2011 and 2012. The legislation passed this week didn’t include a similar specification on payment of taxes on conversions.

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