Three Hidden Roth Conversion Opportunities

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Roth IRAs are amazing tax saving tools. Roth IRAs allow investors to grow their money tax-free. Even though there is no deduction for contributions, a Roth IRA provides the dual benefits of tax-free accumulation and tax-free distributions after age 59 1/2. The long-term benefits can be significant.

We suggest you fund your Roth IRA even when you can’t afford it and that you use taxable savings as your seed money.

In addition to making Roth contributions, we frequently recommend moving assets from your traditional IRA into a Roth IRA in what is called a Roth conversion. Roth conversions can avoid future Required Minimum Distributions (RMDs), enhance the value of your estate, and smooth your tax burden across several years.

Roth conversions are almost always a good idea and converting something is almost always better than doing nothing. There is a “best conversion,” and we can do our best to predict which plan it is, but even the “worst conversion” plan can save hundreds of thousands or even millions of after-tax value over doing nothing.

I am very glad that we have inspired quite a base of Roth-loving readers who are passionate about Roth contributions, Roth conversions, and careful estate planning to protect their Roth IRAs.

However, even the most Roth-loving individuals may have hidden Traditional assets that they do not know they can convert to Roth. Here are just a few places to look.

You can covert SEP and SIMPLE IRAs.

Most people who are familiar with conversions know that they can convert their traditional IRAs (sometimes called Contributory IRAs or IRA Rollovers), but did you know you are free to convert the employer accounts that are called IRAs as well?

Both SEP-IRAs (Simplified Employee Pension IRAs) and SIMPLE IRAs (Savings Incentive Match Plans for Employees) are available for conversion even while you are actively contributing to them. This means that you can do a variant version of a backdoor Roth. You contribute the assets to your SEP-IRA and receive the SEP-IRA contribution deduction. Then, you convert the assets to your Roth IRA, reporting the conversion basis as a part of your taxable IRA Distributions. This might be effectively neutral on your taxable income but means that you get to squirrel away savings in your Roth IRA instead of a traditional account.

You can rollover your 401(k) or 403(b) into an IRA Rollover and convert from there.

You can use an IRA Rollover to move assets from an employer sponsored plan, like a 401(k) or 403(b) plan, into an Individual Retirement Account (IRA). We have a guide on “How to Rollover Your 401(k) into a Schwab Institutional Intelligent Portfolio with Marotta Wealth Management” for our “Do-It-Yourself” service level clients.

Once the assets are in an IRA Rollover, you can convert per usual to your Roth IRA according to your conversion plan.

Each employer-sponsored retirement fund has a different set of rules governing it. However, there are a few universal rules.

If you are older than age 59 1/2, the IRS rules allow you to roll out your employer plan funds even if you are still employed with the company.

Also, if you are “out of service,” meaning retired or terminated, then you are free to move your assets out of the company retirement plan and into an IRA whenever you wish regardless of age.

Some retirement plans allow in-service in-plan Roth conversions. For example, this would be converting assets from Traditional 401(k) to Roth 401(k) using your 401(k) plan’s paperwork.

Also some components of a 401(k) plan may be allowed to be rolled out while in-service even if others can’t. For example, employee deferrals are locked in a plan until you are over 59 1/2 or out of service, but sometimes a plan will allow any vested Profit Sharing portion to be rolled into an IRA Rollover while in-service and then converted from there.

You can find out more about what specifically you can rollout by talking to your HR department. If you are a plan sponsor and you’d like to talk with us about what is possible for your plan, we would be happy to talk to you as a part of our Retirement Plan Management service.

You can rollover your 457(b) plan into an IRA Rollover and convert from there.

Although 401(k) and 403(b) are the two most common employer-sponsored retirement account types, those who have access to 457(b) plans have access to a large amount of additional tax-advantaged savings opportunities.

Before the 2001 Economic Growth & Tax Relief Reconciliation Act (EGTRRA), 457 plan assets were only allowed to be housed in 457 plans. However, since EGTRRA in 2001, governmental 457 plans (and sadly, only governmental 457 plans; non-governmental ones are excluded) are allowed to be rolled over into an IRA.

You can perform these rollovers after age 59 1/2 or when you are “out of service,” meaning terminated or retired from that employer. Once the assets are in an IRA Rollover, you can convert per usual.

The steps in our guide “How to Rollover Your 401(k) into a Schwab Institutional Intelligent Portfolio with Marotta Wealth Management” are the same for 457 plans even though they have a different name.

Photo by Suhyeon Choi on Unsplash

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Chief Operating Officer, CFP®, APMA®

Megan Russell has worked with Marotta Wealth Management most of her life. She loves to find ways to make the complexities of financial planning accessible to everyone. She is the author of over 800 financial articles and is known for her expertise on tax planning.