Traditional Or Roth Retirement Plan Contributions?

Traditional or roth retirement plan contributions? A provision of the American Taxpayer Relief Act of 2012 (ATRA) allows many people with savings in workplace retirement plans to make "in-plan Roth conversions." They can move savings from traditional, before-tax 401(k), 403(b), or 457 plan accounts to Roth plan accounts without a distributable event (such as death, disability, or reaching age 59½) as long as the employer offers both options.

Traditional contributions

In general, traditional contributions to retirement plan accounts are made with
before-tax dollars so they reduce current income. Any earnings in these accounts
grow tax-deferred until assets are withdrawn. Generally, that's at retirement.
Distributions from Traditional accounts generally are taxed as ordinary income.

Roth contributions

Contributions to Roth retirement plan accounts are different. They are made with after-tax dollars so they do not reduce taxable income today. Any earnings in Roth accounts grow tax-free. Distributions from a Roth account are tax-free and
penalty-free as long as the five-year participation period requirement is met and the distribution is taken for a qualified purpose, such as reaching age 59½ or becoming disabled.

How do I decide whether a conversion is right for me?

The decision about whether to convert a Traditional workplace retirement plan
account to a Roth workplace retirement plan account should be based on criteria
that are similar to the criteria used when deciding whether to convert a Traditional IRA to a Roth IRA. These include:

• Tax brackets now and in the future: If you think you'll be in a higher tax bracket during retirement than you're in today, then a Roth conversion may make sense.
• Assets available to pay the taxes due: When you convert from a Traditional to a Roth plan account, you will owe taxes on the assets you convert. If you have non-retirement savings available to pay these taxes, a Roth conversion may be a good choice.
• Legacy and estate planning goals: If a Roth 401(k) account offers estate planning opportunities that suit your needs, conversion may be a good choice.
• Income needs during retirement: If having a source of tax-free income to supplement taxable income during retirement could boost retirement income, then a Roth conversion may make sense.
  Source: Investment News

It's important to recognize a retirement plan conversion is different from an IRA
conversion. Plan conversions do not allow a do-over while IRA conversions can
be revoked for a certain period of time. If you have any questions about this topic, please give us a call.

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Best regards,

James T. Parks, CFP®, AEP, AIF
President and Wealth Advisor

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