401(k)s

New Rules for Converting to a Roth 401(k)

More plans now allow rollovers while you’re still on the job, but make sure you have enough money outside the account to pay taxes.

Can I convert money in my 401(k) to a Roth 401(k) while I’m still working at my job?

Until this year, you generally couldn’t make the conversion while you were still working for the employer who sponsors your plan. But now the law has changed to permit the transfers. You can convert some or all of the money in your 401(k) to a Roth 401(k). If you do, you’ll have to pay taxes on that money for the year you make the conversion. But you can withdraw Roth 401(k) money tax-free in retirement, as you would with a Roth IRA.

Although rollovers are permitted, not all employers offer the option yet. Only about 34% of the 401(k) plans administered by Fidelity offer Roth 401(k)s, for example, and only 12% of those plans have been amended to permit these in-plan conversions. Ask your plan administrator if you can make this move and, if so, what steps you’d need to take. Fidelity, for example, currently permits the conversion only over the phone, rather than online, so its representatives can explain the tax implications.

"The transaction itself is simple, but you want to make sure you’re planning for the fact that you’ll be hit with a pretty large tax liability," says Donna Norwood, senior vice-president of Fidelity. Be sure you have enough money outside of the account to pay the tax bill, so you don’t have to pay an early-withdrawal penalty to get the cash.

Converting some money in your 401(k) to a Roth 401(k) can be a good opportunity to have some tax-free income available in retirement, especially if most of your retirement savings are in a tax-deferred account with your current employer. "We always talk about being diversified among the asset classes in your plan, but it also helps to be tax-diversified," says Norwood.

The decision to convert money from a 401(k) to a Roth 401(k) is similar to the decision to convert from a traditional to a Roth IRA (although, unlike with IRAs, you can’t "recharacterize" a Roth 401(k) conversion and switch that money back to a traditional 401(k) later). See 7 Myths About Roth IRA Conversions and Should You Convert to a Roth IRA? for more information about the conversion decision.

Most Popular

Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
You Can Appeal a Medicare Premium Surcharge
Medicare

You Can Appeal a Medicare Premium Surcharge

If you meet one of the seven qualifying life events, you have a good chance of getting a higher premium for Medicare Part B and Part D reduced.
June 16, 2021
12 Housing Stocks to Ride the Red-Hot Market
investing

12 Housing Stocks to Ride the Red-Hot Market

The U.S. has a housing shortage and a love affair with home improvement, both of which could create tailwinds for this group of housing stocks.
June 8, 2021

Recommended

401(k) Basics: 7 Things You Should Know When You Enroll
401(k)s

401(k) Basics: 7 Things You Should Know When You Enroll

When you start a job there’s a ton of paperwork to fill out, but don’t let that keep you from carefully considering what to do about signing up for yo…
June 16, 2021
Invest in a Roth 401(k) If You Can
401(k)s

Invest in a Roth 401(k) If You Can

Workers of all ages can benefit from stashing away after-tax money now in exchange for tax-free withdrawals in the future.
June 11, 2021
Should My Money Stay or Go? Employer 401(k) vs. IRA Rollover
401(k)s

Should My Money Stay or Go? Employer 401(k) vs. IRA Rollover

Employers are the newest contenders for the rollover assets from your retirement plan. Here’s what to consider when leaving your job and choosing whet…
June 11, 2021
Your Secret Weapon to Help Win the Retirement Saving Battle: Roth 401(k)
401(k)s

Your Secret Weapon to Help Win the Retirement Saving Battle: Roth 401(k)

Thanks to their unique tax benefits and the higher amounts you can contribute, Roth 401(k)s have a lot going for them, when compared to their traditio…
June 4, 2021