Roth 401(k) from Traditional 401(k): Easier Since the Fiscal Cliff

We’ve come to expect the congressional infighting with everything these days. But there was some silver-lining with the recent Fiscal Cliff negotiations that has significantly helped retirement account investors. While most of the negotiations in Congress involved preserving or increasing tax cuts and where such lines should be drawn, a little-known caveat actually provided some needed changes to rolling over 401(k) accounts.  In particular, people with traditional 401(k) plans are now able to move the funds into a Roth 401(k) without the early distribution penalty–which occurs if funds are distributed before 59 1/2.

Traditional 401(k) accounts, which include pre-tax salary deferrals, can now be converted at any age to a Roth 401(K). Like a Roth IRA a Roth 401(k) allows for the contribution of taxed income into a 401(k) plan which, when distributed later, is not taxed.

While the converted 401(k) money is still subject to a normal conversion tax, it is not subject to potentially higher taxes which are most likely to take effect when income is distributed to the 401(k) holder at the time of retirement.

Similarly, solo Roth 401(k)s provide such benefits, only they don’t carry the income limitations and caps of a standard Roth 401(k). We expect many employers will now be offering more Roth 401(k) accounts and options to employees since the conversions are now going into effect.

We are Silverstone. Contact us with specific questions about your retirement account.

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