ROTH IN-PLAN CONVERSION: Strategy, & Things To Consider While Preparing Roth In Plan Conversion

roth in plan conversion
Inage credit: JOA

The in-plan design Roth conversion is a strong tool for constructing a retirement plan, but individuals should seek professional advice to handle the tax implications. Is your employer willing to offer both a standard and a Roth 401(k) plan, as well as the option of converting your Roth 401(k) in-plan? This is a strategy in which you convert some or all of your standard 401(k) funds to a Roth 401(k) (k). If that’s the case, it’s critical to understand the dos and don’ts.

In-Plan Roth Conversion

As an In-Plan Roth Conversion, you can convert all or part of your BU Retirement Plan account (other than your Roth Contribution Account) to a Roth Contribution Account. The BU Retirement Plan is where this conversion takes place. You don’t get a cheque and then put it in your Supplemental Retirement and Savings Plan. Although the conversion is a taxable event, moving to a Roth 403(b) can be advantageous if your tax rate is expected to rise in the future.

Before converting your account, you should speak with a tax expert to better understand the implications of an In-Plan Roth Conversion.

If you are qualified, you may take a distribution from your Roth Account assets; otherwise, your funds are subject to the Supplemental Retirement and Savings Plan’s restrictions. A distribution to an active Member on or after reaching the age of 59 1/2; (ii) a distribution made upon termination of employment, becoming disabled, or retirement; (iii) a distribution made upon the Member’s death; or (iv) any distribution that would otherwise qualify as an eligible rollover distribution is considered an eligible distribution.

Things to consider while preparing roth in plan conversion

#1. Get the paperwork right

If your employer permits in-plan Roth conversions, double-check your paperwork. “Despite what custodians say,” Leon LaBrecque, a certified financial advisor with Sequoia Financial Group, said, “it may not be as simple as an online approach.”

#2. What’s your current tax status? 

According to Thomas O’Connell, president of International Financial Advisory Group, depending on where you are on the marginal tax rate scale. Converting to a Roth could take you up that ladder, which might not be a good thing. “Again, depending on your tax rate perspective, moving from a 22 percent to a 24 percent tax bracket may not be a big concern and may save you money in the long run. However, jumping from a 22 percent or 24 percent to a 35 percent will be significant and may negate the conversion’s aim.”

You’ll need to come up with the money to pay the taxes due on the conversion from somewhere else. According to Andy Ives, an IRA Analyst at Ed Slott and Co. “While an IRA conversion can be paid using IRA dollars, which we do not suggest,” he said, “you do not have that option with an in-plan conversion.”

Once you’ve measured twice, you’ve cut once. Dan Moisand, a licensed financial planner with Moisand, Fitzgerald, Tamayo, advises this. “Because the conversion cannot be reversed, it’s essential to double-check your tax estimates before proceeding,” he said. “Higher gross revenues can come with a slew of unpleasant little shocks. In addition to putting you in a higher tax band than you’d like.”

Roth conversions are always a function of whether to pick up the conversion amount as regular income in a given year, according to Charles Sachs. A chief investment officer of Kaufman Rossin Wealth. “It’s a terrific idea to consider for people who have seen a dip in income this year,” he said.

#3. Will your taxes be higher in the future?

Next, think about how you feel about tax rates. An in-plan Roth conversion may be good for you if you believe your taxes will rise in the future, according to Pardo.

Others concur. Whether you’re considering an in-plan Roth conversion or an individual Roth conversion. The first thing you should consider is future tax rates. “People still believe that contributing to a regular 401(k) or comparable plan saves them money,” O’Connell explained. “As an accountant recently told me, ‘There’s no saving involved. So, if you believe your taxes will rise in the future, you’re probably better off performing that Roth conversion now.”

Even more complicated is the fact that, according to Michael Peterson, a certified financial planner with Faithful Steward Wealth Advisors. Taxing Social Security benefits and/or triggering the income-related monthly adjusted amount (IRMAA) could force participants to pay higher Medicare premiums in future years. “As a result, determining the advisability of an in-plan Roth conversion needs more than just a tax bracket study,” he explained. “To accurately establish the benefits and drawbacks. A full-fledged retirement income and tax estimate are required. Failure to do so could result in higher Social Security taxes and Medicare premiums. Which could outweigh the benefits of an in-plan Roth conversion.”

#3. State of the stock market

Another factor to examine, according to O’Connell, is the status of the capital markets. He stated, “We are magically seeing record highs. Doing a conversion today means paying taxes on a greater account value, and you may be disappointed if the market falls. Which it will at some point because there are no more recharacterizations. As a result, deciding at what level to convert is crucial. People still believe it’s an all-or-nothing situation, but it’s not. To control your tax due from the conversion, you could choose to do it piecemeal over time.”

#4. Don’t forget the five-year rule

According to Moisand, a 401(k) is not an IRA, and those funds have distinct clocks for the five-year year rule. “Every now and again, we meet new retirees who believe they can obtain their Roth 401(k) tax-free. But they can’t collect earnings tax-free after rolling to a Roth IRA since they didn’t have one,” he explained.

If this is your first move into Roth under the plan, your clock starts on January 1 of the conversion year, according to Ives. It’s worth noting, though, that the five-year clock on an in-plan conversion is distinct from any clock on a Roth IRA.

#5. The pro-rata rule

The so-called pro-rata rule, according to O’Connell, could affect any conversions you do if you have additional qualifying accounts. “Can your plan’s after-tax contributions be targeted for conversion while the pre-tax monies stay unconverted?” Ives wondered. “This ‘tax-free’ conversion could be possible if the plan accounts separately for after-tax dollars and their earnings.”

#6. RMDS could start at 72

It’s crucial to remember, according to JoAnn May, a principal with Forest Asset Management. That if your assets stay in an employer-sponsored plan after age 72, you’ll be compelled to take a distribution from the plan. Whether it’s a designated Roth account or a pretax 401(k) account. “To prevent this, it’s advisable to roll over at least the Roth component of the plan assets before turning 72, as Roth IRAs don’t require distributions,” she noted.

If you’re over 59½, you might consider rolling your 401(k) to a Roth IRA, said LaBrecque. “Roth 401(k)s have RMD requirements, Roth IRAs do not.”

#7. Inherited Roth 401(k)s

If you are the spouse of someone who has inherited a Roth IRA or Roth 401(k), you can roll it over to your own name, according to Patricia Hausknost, a certified financial planner and instructor in UC Berkeley Extension’s certificate program in personal financial planning. “If not, you’ll have to draw distributions within five years if it’s a Roth IRA. Or ten years if it’s a Roth 401(k), presuming contributions started at least five years before the date of death,” she added.

In-Plan 401(k) Roth Conversion Strategy

Presto! Convert a pre-tax 401(k) to a Roth 401(k) (k). It’s done through a Roth conversion that’s already in the works (also known as an in-plan Roth rollover). It used to be that just a few employees could undertake this risky tax move to construct a tax-free retirement fund. But thanks to a 2013 expansion of the law and new Internal Revenue Service rules released last month, the chance is now open to more employees.

“This is going to be a 2014 initiative for employers now that the guideline is out,” says Alison Borland. Vice president of retirement solutions and strategies at Aon Hewitt. Aon discovered that over the previous six years. The percentage of businesses who accept Roth contributions (a criterion for permitting in-plan conversions) has climbed from 11 percent to 50 percent in a survey of 400 employers representing over 10 million employees. In addition, 27% of plans that allow Roth contributions also enable Roth conversions within the plan. Another 16% of businesses said they planned to implement the conversion feature in the following 12 months.

The Roth 401(k) has the advantage of providing years of tax-free growth rather than tax-deferred growth. The disadvantage is that you must pay income tax on the amount you convert upfront. Whereas with a pretax 401(k), you only pay income tax when you withdraw the funds in retirement.

As a result, the in-plan conversion method is particularly wise for high-net-worth individuals who don’t need all of their 401(k) money for retirement expenses. But wish to build it as an income-tax-free bequest for their spouse and/or children.


“Don’t,” said Ives, “haphazardly dive into an in-plan Roth conversion without knowing the depth of the water.” Others share that point of view. There is a lot to consider before executing an in-plan Roth conversion, said O’Connell. “Some of those considerations are just plain old objective math calculations, others are very emotional,” he said. “This is a big decision. Doing it correctly could mean literally thousands and thousands of dollars saved from taxes. Done wrong it can be an economic catastrophe for someone and their family.”


How are in-plan Roth conversions taxed?

There is no income tax withholding required on an in-plan Roth direct rollover. However, if you receive a distribution from your plan, the plan must withhold 20% federal income tax on the untaxed amount even if you later roll over the distribution to a designated Roth account within 60 days.

What are the differences between an in-plan Roth conversion and a Roth IRA rollover?

A conversion moves retirement funds to a Roth IRA account outside the retirement plan. An IP rollover (sometimes called an in-plan Roth conversion) involves moving pretax retirement funds to a designated Roth account within the retirement plan.

What is the downside of a Roth IRA?

One key disadvantage: Roth IRA contributions are made with after-tax money, meaning there’s no tax deduction in the year of the contribution. Another drawback is that withdrawals of account earnings must not be made before at least five years have passed since the first contribution.

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