Benefit Of New Budget Deal Favors 401(K) Conversions To Roth 401(K)s, Opening Options For Plan Participants

Thursday, January 03, 2013 20:22
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Benefit Of New Budget Deal Favors 401(K) Conversions To Roth 401(K)s, Opening Options For Plan Participants

Tags: 401(k) | investment strategies | roth ira conversion

The new budget deal struck on January 1 offers a perk to 401(K) participants that allows them to convert monies in those accounts to Roth 401(K)s that allow tax-free retirement income withdrawals.
 
Since the money they would withdraw from their accounts during the process of conversion would be taxed, the benefit is expected to raise $12.2 billion in tax revenue.

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There are three ways you can use this to grow your business:
 
1) If you are already working with plan sponsors, you can educate them on the new law and encourage them to offer Roth 401(K)s if they don’t already do so.
 
2) You can build relationships with plan sponsors who already offer the Roth 401(K)s by educating employees who are plan participants.
 
3) You can educate your ultra-high-net-worth clients on the estate planning benefits the new law offers them.
 
Previously, conversions to Roth 401(K)s were limited to certain funds and plans that allowed them. The new law opens the conversion option to employees who hold over $5 trillion in employer defined-contribution plans, including 401(K)s.
 
Now, any amount can be transferred to the Roth 401(K) and future earnings will accumulate tax free and no taxes will be due upon withdrawal.
 
The new law also facilitates the ability of the wealthy to leave retirement counts to heirs who may have more time to accumulate earnings.
 
A 2010 law allowed some 401(K) participants to convert some of their money to Roth 401(K)s if their employers offered the plans and also offered the option to convert.
 
Only money that was already eligible for distribution could be converted, basically held by employees over the age of 59 ½ and some employer contributions. The new law sets no limits and may encourage other employers to offer Roth 401(K) plans.
 
One thing to note. When the IRS lifted the income threshold restrictions for Roth IRA conversions in 2010, it also allowed taxpayers to either pay all of the tax due in 2010 or to split their tax payments on the converted money over 2011 and 2012.
 
There are no such payment options offered in the new law. If policy makers, investment managers, advisors, and plan sponsors do not educate participants on these new benefits, the expected new tax revenues may never materialize and you may lose out on some significant business and relationship building opportunities.

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