Recent Changes in Roth 401(k) Rules Enable Greater Tax Diversification

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New rules governing 401(k) plans allow sponsors to offer a Roth conversion option. Plans such as the Roth Solo 401(k) are attracting increased interest due to these changes, according to Sense Financial Services, California's leading provider of self-directed retirement accounts.


Roth conversions are a strategy for retirement planning

Employers can now offer participants the option of converting pre-tax contributions to Roth contributions. This option is a result of the American Taxpayer Relief Act that was passed in January. The Act brought new changes to Roth 401(k) rules, including the option of Roth conversions. Plan sponsors may offer this option to participants of plans that allow in-plan conversions and contain a Roth option.

The American Taxpayer Relief Act (ATRA) was passed by Congress in an effort to address last year’s fiscal cliff crisis. The Act dealt with the potential changes resulting from the expiration of the 2001 and 2003 Bush tax cuts. ATRA preserved some of the lower tax rates from the Bush tax cuts while establishing the higher rates for upper income levels. The Act also set caps on specific tax deductions and credits.

ATRA allows plan sponsors to offer the option of converting pre-tax contributions into Roth contributions. Previously Roth conversions were available only to those whose distributions were already eligible for rollover. Roth conversion can now occur even if the contributions are not currently eligible for distributions.

Roth contributions are made with after tax dollars which can later be withdrawn tax-free. While the tax break is not given upfront, it is given at the point of withdrawal, allowing a source of tax-free income during retirement. Earnings on Roth contributions are also tax-free if the account is held over a period of five years and the participant has reached age 59 1/2 or is disabled or deceased.

This new change allows for greater diversification of tax exposure during retirement, an important but often overlooked component of retirement planning. A heavy tax burden can quickly drain retirement savings. As retirement continues to be the top concern for most Americans, Roth conversions present a valuable retirement strategy. A Roth retirement account can provide a source of tax-free income during retirement.

Because Roth conversions place the tax burden at the outset, factors such as age and income should be considered before opting for conversion. Those who can allow the fund to grow for a longer period will benefit the most from Roth conversions. Income is also a factor in choosing the Roth conversion option. If the conversion moves the participant to a higher income tax bracket, it may not be an effective strategy for tax diversification.

Sense Financial Services, a provider of retirement accounts in California, has seen a growing interest in the Roth account. Their self-directed Solo 401(k) plan offers a Roth sub-account in which clients can contribute after-tax dollars. As tax rates continue to rise, many consumers have been drawn to retirement plans with tax solutions, such as the Roth Solo 401(k).

About Sense Financial Services:

Sense Financial is California's leading provider of retirement accounts with “Checkbook Control”: the Solo 401k and the Checkbook IRA. Over the years, they have assisted hundreds of clients obtain checkbook control over their retirement accounts while providing them with the ability to invest in virtually any investment class, including real estate, private lending, mortgage notes and much more without the need for custodian approval.

To learn more about the solutions they provide, please contact: (949) 228-9393.

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Dmitriy Fomichenko
Sense Financial Services
(949) 228-9393
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