Roth conversions easier, but are they right?

When you are deciding whether to convert your IRA/401(k) to a Roth seek the advice of an objective financial professional. With the increasing tax environment we need to assess the value of a conversion now. It may be right for some and not for others.

Scrabble Series Roth IRA Ver2
Scrabble Series Roth IRA Ver2 (Photo credit:

So when might a Roth conversion make sense?Appleby said the following are some of the cases in which Roth conversions may make sense:

  • The IRA owner wants to leave a tax-free inheritance to his beneficiaries, and does not care how much it costs him to pay the taxes now, even if it would cost more if he pays the taxes instead of his beneficiaries paying the taxes.
  • The results of comprehensive Roth conversion analysis shows that a Roth conversion will very likely make good tax/financial sense.
  • The IRA owner is at the lower end of the tax-rate scale now, and will very likely be in a much higher tax-rate scale as his income increases including during retirement.
  • The IRA owner has enough deductions and tax credits to offset the tax bill that would be due on the Roth conversion.

There is no cookie cutter solution to the question, should I c3onvert my IRA/401(k) to a Roth? Each individual has unique circumstances and should the objective advice of an independent fiduciary.

Please comment or call to discuss how this affects you and your family.

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Roth 401(K) Conversions For All Thanks To Fiscal Cliff Deal

Plan sponsors need to review their 401(k) plan to determine that the plan is appropriate. There is also an imperative need to educate their employees on any tax changes. Plan sponsors fiduciary responsibilities and risks will be taking center stage for some time.

Scrabble Series Roth IRA Ver1
Scrabble Series Roth IRA Ver1 (Photo credit:

The new rules become effective Jan. 1, 2013, but you can transfer amounts contributed to pre-tax accounts in 2012 and earlier. So say you had made pre-tax 401(k) contributions over the years before your employer started offering the Roth 401(k) option. You could convert the pre-tax contributions and any earnings and any employer match, so that your whole account is Rothified. Going forward you could then make contributions earmarked directly to the Roth 401(k) account.The strategy is much like converting a traditional pre-tax IRA to a Roth IRA, a move savvy taxpayers make who think it’s worth paying taxes now—at historically low rates—rather than later. You pay income tax on the amount you convert. The Roth grows tax free and eventual distributions are tax free. A Roth conversion makes sense if you expect your tax rate to be the same or higher in retirement and won’t need the funds for a decade or more. It’s also an attractive way to leave an income-tax-free inheritance to your kids or grandkids.

“It’s a huge opportunity for younger workers who have the cash on hand to pay the conversion tax,” says Urwitz. For employees who have larger pretax balances, they can convert part of the 401(k) at a time. The longer the money has to grow, the more likely it is that the conversion will be worthwhile.

Plan participants should check with their employer to determine whether the Roth option is available. The next step would be to seek the advice of a financial professional. Preferably an independent fiduciary. If your employer provides such advice take advantage of it, if not seek outside guidance.

Please comment or call to discuss how this affects you and your financial future.

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Roth 401(k)s vs. Traditional 401(k)s

By now, most Americans understand that at the very least, they should be participating in their employer’s defined contribution plan, most commonly offered in the form of a 401(k). But some companies offer two forms of these plans: the traditional 401(k) and the Roth 401(k). You thought deciding how much to allocate to your plan and then researching and electing the investment funds to support it was confusing enough, but here you are, faced with yet another option for safeguarding some retirement funds. Let’s break it down just a bit more.

What’s the difference?
The primary difference between a traditional and a Roth 401(k) is simple but significant. With a traditional 401(k) plan, your contributions grow tax free, and you pay taxes on the withdrawals; Roth 401(k)s, on the other hand, work in precisely the opposite way, as you pay taxes on your contributions but not on your withdrawals.

Additionally, Roth 401(k)s tend to be seen as more of an estate planning tool, since they do not necessitate that you to take required minimum withdrawals (RMDs) once you reach age 70 ½, as you must do with traditional 401(k)s. This allows you to leave your funds untouched for as long as you want after retirement, letting your investment grow tax free all the while.

Which is right for you?
This is a conversation best held with your financial advisor, as you must determine whether the back-end payoff of a Roth 401(k) outweighs the benefits of traditional tax deferral on the front end, but generally speaking, it depends largely on where you are in life and into which tax bracket you fall.

If you’re relatively young with an eye toward saving for retirement and you don’t earn a great deal of money, a Roth 401(k) may be worth exploring, as the upfront tax-savings benefits wouldn’t be as significant to you as a tax-free payout in retirement. Conversely, if you’re an established earner in a higher tax bracket, getting up-front tax-advantaged treatment is probably best, making the traditional 401(k) your most likely option. This is especially true for individuals who expect to be in a significantly lower tax bracket when they retire.

You can even double-dip.
If your employer does offer both types of 401(k) plan, you can split your contributions between the two if you so choose, as long as your  combined annual contributions do not exceed 2012’s annual limit of $17,000. If you’re 55 or older, that limit jumps to $22,500.

With so many options, there is a 401(k) plan, or a combination of the two, that is ideal for your current situation. But before you make your decisions, be sure to weigh these considerations carefully, especially if you don’t speak with a financial advisor regularly.

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If Roth 401(k) were a human being, he would be going through an existential crisis.

Part of every retirement plan discussion should include the use of the Roth 401(k). Not everyone would benefit from this component but it should be considered when planning your retirement.

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“[The] lack of savings by our population is going to be one of the biggest crises our country will face,” says Mark Ratay, financial adviser with The Ratay Group and Corporate Retirement Director of Morgan Stanley Smith Barney in Lisle, Illinois. “But when you go out there and start talking to the masses, all but the most sophisticated investors don’t get it. They’re already confused about saving in a 401(k). So, when you get into the Roth topic, you’re throwing one more thing up in the air to confuse them,” he says.

“Of all the issues that are out there, I’m not sure I would have this at the top of my list, since there are so many variables with Roth. We all know that [participants] are not saving enough, and the issue of lifetime income from a 401(k) account is taking up a good amount of education time,” says Sean Deviney, Financial Planner, Provenance Wealth Advisors in Fort Lauderdale, Florida, agreeing with Ratay’s sentiment.

“I do think the Roth is a great option, but it isn’t a ‘problem’; it just hasn’t been adopted as quickly as the industry thought it would be,” he says, adding that the Roth 401(k) option is more of a tax planning tool, not necessarily a better alternative than the traditional 401(k).

At the very least, advisers say, plan sponsors should have the Roth option in their 401(k)s.

The Roth 401(k) is a great option for part of your retirement savings, however it should be discussed with your tax professional. The biggest challenge is and should be increasing savings rate for all American workers.

Please comment or call to discuss how to improve the savings rate for your company employees.

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Been There, Done That. Now What?

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Plan design is a very important component to allowing you plan to attract and retain top talent. This talent will be crucial in small to mid sized companies to remain competitive.

Paying Now or Paying LaterWhat we said: As with self-directed brokerage accounts, the Roth conversion window (and its affiliated tax acceleration) seems most likely to appeal to the highly compensated minority. The impetus for the conversion itself is not only the timing window, but also the (still) looming sunset of the Bush Administration’s tax cuts. Of course, the real issue may be a shift in assumptions about taxes; what if they won’t be dependably lower in retirement?

Where we are: Perhaps the most surprising trend to emerge from this year’s PLANSPONSOR Defined Contribution Survey was a huge increase in the offering of Roth 401(k)s, an option that “plan sponsors have long been reluctant to push since their pay-it-now concept on taxes seems at odds with the traditional tax-deferral mantra, and their benefits are often seen as skewed toward more highly compensated workers.” This year’s survey found that 38.2% of all plans now offer the option, compared with just 20.2% a year ago, and that increase was broad-based across market segments. Of course, just try finding someone today (who is not running for political office) who is expecting taxes to be lower in the future.

What’s ahead: As with self-directed brokerage accounts, the Roth conversion window (and its affiliated tax acceleration) seems most likely to appeal to the highly compensated minority. Many more plans are now offering the choice, but it remains to be seen if participants will respond in kind. I would guess not that many in the short term—but that, of course, could change.

Plan design is critical to many small businesses to realize a true employee benefit. One which will attract and retain talented employees.

Please comment or call to discuss how this could affect you and your company.

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