With the enactment of the Small Business Jobs and Credit Act of 2010, workplace retirement plans were expanded for many employees.
That law made it possible for workers to convert their traditional 401(k) plans, in which money is contributed pretax and earnings grow tax-deferred, to Roth 401(k)s.
Like its Roth IRA cousin, money goes into a Roth 401(k) after taxes are taken out, but eventual retirement distributions are tax free.
Now, thanks to the American Taxpayer Relief Act of 2012 (ATRA), otherwise known as the fiscal cliff bill enacted this Jan. 2, it is even easier for more workplace retirement account owners to take advantage of Roth 401(k)s.
The change in this workplace retirement plan option is today's Daily Tax Tip.
Previously, you could only convert a traditional 401(k) to a Roth 401(k) under specific circumstances.
Most notably, that meant you had to be at least are age
59½ or dead, disabled or separated from service. That last situation is tax speak for fired or quit.
But now thanks to ATRA, you can convert your traditional 401(k) to a Roth 401(k) whenever you want.
Benefits all around: The reason for the change is good for a lot of workers as well as for Uncle Sam.
If you run the numbers for your personal situation — and remember that despite its tax-free distribution allure, a Roth 401(k) (or Roth IRA) is not right for everyone; Michael Kitces looks at conversion considerations at his blog Nerd's Eye View — and find you want a Roth workplace retirement account, you now can make the change when you're ready.
You don't have to do it all at once. Since you must pay taxes on the converted amount, it might be wise to make the conversion in stages when you have the money to cover the tax bill.
And those taxes are why the change in the workplace conversion rule also is good for the federal government. As more folks go to a Roth 401(k), it will mean more money sooner in the U.S. Treasury.
The traditional-to-Roth rule change also applies to similar workplace retirement plans outside the private sector, such as 403(b) plans for workers at nonprofits and 457(b) plans for government employees.
Ask for a Roth 401(k): In addition to having to pay conversion taxes, the other problem is the availability of the Roth 401(k) option. It's still a relatively new plan choice, so not all companies offer it.
As Bankrate.com retirement blogger Jennie Phipps notes, that could be a big mistake. Roth 401(k)s are more appealing to younger workers, the ones that companies typically want to attract and retain.
So if your employer doesn't offer a Roth 401(k), ask your boss to look into the option. Then roll your traditional 401(k) into the Roth option whenever you want.
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