The Wall Street Journal
Weekend Investor – Family Value – January 5, 2013
Time to Convert to a Roth 401(k)?
By Kelly Greene
The new legislation expands a 2010 law that gave workers investing through so-called defined-contribution plans such as 401(k)s the leeway to roll pretax savings and employer contributions into Roth accounts within their plans.
The attraction: After paying an upfront tax bill, future earnings and retirement withdrawals generally would be tax-free.
Comments January 5, 2013
The new ‘permanent’ 2013 tax laws present a host of opportunities and pitfalls for those converting pre-tax retirement savings to tax-free retirement savings. Make one wrong move and it can literally cost you dearly.
Both in-plan conversions of pre-tax 401(k) savings to tax-free Roth 401(k) savings and conversions of Traditional IRAs to Roth IRAs can generate taxable income for most taxpayers. The converted amounts are treated as additional income when you file your taxes.
That additional income can push you into the top 39.6% marginal income tax bracket and the top 20% rate on long-term capital gains and dividends for those making $400,000 (single) or $450,000 (couples). It could also push you into the personal exemption and deduction phase-out category for those making $250,000 (single) or $300,000 (couples). It could also subject you to the 3.8% investment surtax on interest, dividends and capital gains for those making $200,000 (single) or $250,000 (couples). Importantly, most of these taxes are cumulative at the incremental income levels.
Fortunately, converting in measured increments can avoid unnecessary taxes. Work closely with a Registered Investment Adviser (RIA) to determine your best course of action.
Aaron Skloff, AIF, CFA, MBA
CEO – Skloff Financial Group
Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of Business Administration (MBA), is the Chief Executive Officer of Skloff Financial Group, a Registered Investment Advisory firm. The firm specializes in financial planning and investment management services for high net worth individuals and benefits for small to middle sized companies. He can be contacted at www.skloff.com or 908-464-3060.