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BUSINESS OF
MEDICINE
A Choice: Taxable or Tax-Free In Retirement?
Some retirement plans are allowing Roth Conversions
From Aspect Wealth Management
Forty years ago, the Stanford marshmallow experiment explored tions also allowed in-plan Roth rollovers or conversions. Another
self-control by offering preschoolers a choice: Take a marshmallow 16 percent of plan sponsors are expected to add the feature by the
immediately and get only one or wait to take a marshmallow and end of 2014.
get two. Some chose the first option; others the second. Soon, par-
ticipants in some 401(k), 403(b), and 457 plans may be faced with Roth In-plan Conversions
a comparably difficult choice. In its most abbreviated form the de- In-plan Roth conversions are not new. Since the Small Business
cision boils down to this: Do you want taxable or tax-free income
when you retire? Jobs Act passed in 2010, plan participants who qualified to take dis-
tributions — generally meaning they had reached retirement age,
Recent legislation has made it possible for plan sponsors to allow were retiring, or were leaving their employer — were eligible to con-
plan participants to convert their Traditional employer-sponsored vert all or part of a Traditional plan account into a Roth account.
retirement plan accounts into Roth accounts. Participants may either That changed with the American Taxpayer Relief Act of 2012
continue to make Traditional pre-tax contributions to their plans, (ATRA) which makes it possible for full or partial conversions to
let their assets grow tax-deferred, and receive taxable distributions take place without a qualifying event, as long as the plan sponsor
during retirement or they can pay taxes today, let their assets grow allows it.
tax-free, and take tax-free distributions as long as certain require-
ments are met.[i] Is a Roth Conversion Right for You?
The idea of having tax-free income in retirement can be appealing,
Traditional and Roth 401(k) Plan Options
The type of employer-sponsored retirement plan account you but Roth conversions are not right for everyone. Here are some
things to consider when weighing the pros and cons:
have — Traditional or Roth — determines how the money you save
in the plan may be taxed today and in the future. Typically, contri- • Current and future tax brackets: If you’re young and expect your
butions to Traditional retirement plan accounts are made with be- tax bracket will increase over time, a Roth may make sense, es-
fore-tax dollars so these contributions can reduce your current pecially if your tax bracket in retirement is likely to be higher
taxable income. Any earnings in Traditional accounts grow tax-de- than it is now. If you expect to be in a lower tax bracket in re-
ferred until withdrawn, which generally is at retirement. Currently, tirement, a Roth may not be for you.
distributions from Traditional retirement plan accounts are taxed as
ordinary income. Savings in Roth retirement plan accounts, on the • Higher tax bill this year: Roth conversions require you to pay in-
other hand, are made with after-tax dollars so they do not reduce come taxes on any amounts converted in the year of the conver-
taxable income today. However, any earnings in these accounts grow sion. You should have non-retirement plan savings available to
tax-free and qualified distributions are federally tax-free. pay these taxes so you don’t incur withdrawal penalties.
Roth retirement plan contributions have been around for less than • Required Minimum Distributions (RMDs): If you won’t need
a decade and were relatively slow to catch on when they were first the assets in your plan account and would like to avoid RMDs
introduced. As a result, if you started saving in a retirement plan at after you reach age 70½, a rollover into a Roth Individual Re-
work more than five years ago, it’s likely all or most of your contri- tirement Account (IRA) may be a good choice since Roth IRAs
butions were made to a Traditional plan account. Since 2007, the do not require withdrawals until after the death of the owner.
number of employers allowing Roth contributions has grown from Roth 401(k) accounts are subject to RMDs.
11 to 50 percent, according to a 2013 study from Aon Hewitt. In
2013, about 30 percent of plans that offered Roth contribution op- Continued on page 34
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