Message Font: Serif | Sans-Serif
 
UnThreaded | Threaded | Whole Thread (6) | Ignore Thread Prev Thread | Next Thread
Author: Fuskie Big funky green star, 20000 posts Top Favorite Fools Old School Fool Ticker Guide SC1 Red Winner of the 2010 Rule Breakers Challenge Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 25223  
Subject: Convert from Traditional 401k to Roth 401k? Date: 11/22/2013 11:01 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
I started with a new employer in July and enrolled in their 401k plan, the first to which I've had access in about 5 years. It's also the first time I've had access to a Roth 401k in addition to a Traditional 401k. At the time, I had thought that the company matching contribution, for which I will be eligible in January 2014, only applied to the Traditional 401k. But when reviewing benefits information for 2014, I learned that the matching contribution applied to the Roth as well.

By the end if the year, I will have made around $2000 in Traditional 401k contributions and I am about 20 years from retirement. My AGI will likely put me in a 25% tax bracket. So the question is, should I contact Fidelity (the plan administrator) about converting the account from a Traditional 401k to a Roth 401k? I am pretty sure the fund investment options are the same, and the added tax liability should be no more than $500. I figure if I am ever to do this, before the end of the year would be cleanest from an administrative perspective.

Fuskie
Who is also wondering if a Traditional company matching contribution is any more or less valuable than a Roth company matching contribution...
Print the post Back To Top
Author: coachtom4 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25162 of 25223
Subject: Re: Convert from Traditional 401k to Roth 401k? Date: 11/22/2013 12:57 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
I doubt that you are eligible to do this if you are still employed at the company. Before you spend much more time researching this I would recommend that you call Fidelity and even ask if you are eligible to do it.

Read the 2nd and 3rd paragraphs here.

http://www.360financialliteracy.org/Topics/Retirement-Planni...

Print the post Back To Top
Author: coachtom4 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25163 of 25223
Subject: Re: Convert from Traditional 401k to Roth 401k? Date: 11/22/2013 3:41 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
Forgot to comment on your "post script." Even if you make Roth 401(k) contributions, any employer matching contribution is still tax deferred.

Print the post Back To Top
Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25164 of 25223
Subject: Re: Convert from Traditional 401k to Roth 401k? Date: 11/22/2013 7:46 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
So the question is, should I contact Fidelity (the plan administrator) about converting the account from a Traditional 401k to a Roth 401k?

Does your plan allow for conversions while you are still employed? The law allows for it, but not all plans do.

If your plan does not allow for conversions funds already contributed, then you can only change the contributions going forward, and won't be able to do any conversions of already contributed amounts.

My AGI will likely put me in a 25% tax bracket.

If you are close to the breakpoint between the 25% and 28% brackets, be sure that the added $2000 won't put you over, or be sure that you are willing to pay at a 28% rate on some of the conversion.

By the end if the year, I will have made around $2000 in Traditional 401k contributions
.
.
.
the added tax liability should be no more than $500


So you've had no gains in your account? Or you are only converting the amount that you contributed, and not the gains?

I figure if I am ever to do this, before the end of the year would be cleanest from an administrative perspective.

From whose administrative perspective? If the plan allows conversions, they don't really care if the contributions were made during the same year or not - the records that they have to keep are the same in either case. And as the participant, I don't know what 'administrative' work there would be for you to do.

If you're worried about the administrative tax issues - they are based on the amount that you convert, not what year the contributions were made.

Who is also wondering if a Traditional company matching contribution is any more or less valuable than a Roth company matching contribution...

Sorry, there is no such thing as a 'Roth company match'. While the company can match the amount that you put into the 401(k) plan, the law requires all company contributions/matches be pre-tax (traditional)

AJ

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: Fuskie Big funky green star, 20000 posts Top Favorite Fools Old School Fool Ticker Guide SC1 Red Winner of the 2010 Rule Breakers Challenge Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25165 of 25223
Subject: Re: Convert from Traditional 401k to Roth 401k? Date: 11/23/2013 1:07 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
AJ, I was told by HR that the conversion was possible. Obviously, Fidelity will have the last word. I am 99% sure I won't be in the 28% tax bracket but am on the edge of 25%. I recognize there will be gains but I'm not expecting the combination of contributions and gains to be much more than $2000. It's just a round number to use. It sounds like the question needs to be put to Fidelity before exploring any options.

Fuskie
Who notes that is not what his HR person told him but if the matching contributions are in fact pre-tax he is not sure the effort will be worth it and instead will probably stick with his non-401k Roth IRA contributions...

Print the post Back To Top
Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25166 of 25223
Subject: Re: Convert from Traditional 401k to Roth 401k? Date: 11/23/2013 1:39 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 6
I am 99% sure I won't be in the 28% tax bracket but am on the edge of 25%.

Whichever bracket you are on the edge of - 15% to 25%; 25% to 28%; 28% to 33%, etc. - the question needs to be - is paying the extra taxes now worth the tax benefit you will get in the future? That basically boils down to - do you think your tax rate in retirement will be higher, lower or the same as it is now? If you think you will be in a higher bracket/rate in retirement, then paying taxes now would be beneficial. If you think you will be in a lower bracket/rate in retirement, then paying the extra taxes now probably costs you money. If you think you will be in the same bracket/rate - then it's pretty much a wash, and whether you contribute to a Roth or a Traditional 401(k) probably becomes more of a an issue of current cash flow, because of the extra income taxes withheld from your paycheck for a Roth contribution.

Who notes that is not what his HR person told him but if the matching contributions are in fact pre-tax he is not sure the effort will be worth it and instead will probably stick with his non-401k Roth IRA contributions...

Well, either the HR person you talked to doesn't understand the law, didn't understand your question, you asked the wrong question, or you misunderstood the answer you got. If a company makes matching contributions, the match is the same whether the employee's contributions are Roth or Traditional - a typical match is 50% on the first 6% contributed. So if you are contributing 6% of your salary, the company will contribute 3%. From a cash flow perspective, if you are contributing the 6% as a pre-tax (traditional) contribution, you will have fewer income taxes withheld from your paycheck compared to if you were making a Roth contribution. That means, by making the contribution a Roth contribution, you are decreasing your take-home pay by the amount of income taxes that will be withheld. In either case the 3% matching contribution will be pre-tax, because the company is making the contribution, and the law requires that company contributions be pre-tax.

So, if the question that you asked was "Will my Roth contribution be matched like my traditional contribution?" - the answer is yes - but the answer doesn't say anything about the tax treatment of the match. The question you needed to ask was - "If I make Roth contributions, will my match be Roth or pre-tax?" The answer to that question is - it will be pre-tax.

However, I don't know why the fact that the law requires all company/matching contributions to be pre-tax would prevent you from making your future contributions Roth contributions, or converting your previous contributions to a Roth, IF it makes sense from a tax standpoint (and from a cash flow standpoint). You will just have 2 different accounts in the 401(k)- one Roth and one non-Roth accounts. Each account will be tracked separately by Fidelity, with no effort on your part, and when you leave this employer, you will have the option to roll the Roth account into a Roth IRA, and roll the traditional account into either a traditional IRA, or, if you are willing to pay the taxes, into a Roth IRA. So, if you decide to roll your 401(k) into an IRA, that may require a little extra effort on your part, to deal with 2 account. However, the question really revolves around the tax issue vs. any administrative issue. If the Roth option will save you money in the long run, and you can afford the extra cash flow, it's probably worth the extra time to fill out paperwork on 2 rollovers instead of 1.

AJ

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
UnThreaded | Threaded | Whole Thread (6) | Ignore Thread Prev Thread | Next Thread
Advertisement