Posted on 24 January 2013
By Mark Miller
It was a small but important line item in the recent “fiscal cliff” deal. As part of the American Taxpayer Relief Act of 2012, Congress made it possible for all retirement savers to convert their 401(k) accounts to a Roth 401(k) without moving money out of the workplace plan.
The law permits all retirement savers to convert existing 401(k) retirement plan assets to a Roth 401(k), so long as their plan offers Roth options and adds the conversion feature. Previously, conversions could be done only by savers who also were eligible to take a distribution from the plan — in most cases, people age 59½ or older.
What do Roth conversions have to do with the fiscal cliff? Very little.
In theory, conversions will generate income tax revenue, and Congress needed to find some to get the fiscal cliff deal done. The Roth 401(k) expansion is projected to generate $12.2 billion over 10 years, because income tax is due in the year of conversion from a qualified account. But the Roth provision really is an accounting gimmick, since it merely accelerates payment of taxes the government would otherwise get down the road when account holders take distributions in retirement.
And the benefit to retirement savers? That’s more complicated. Learn more at Reuters Money.