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401k Roth conversion – Is it right for you?

401k Roth conversion – Is it right for you?

January 31, 2022

Saving for retirement is made easier with a 401(k), and now you have another option that can give you tax advantages. For employees at the Los Alamos National Lab (LANL), your TRIAD 401(k) allows you to convert pre-tax contributions into an after-tax Roth account within your retirement plan. It's called an “in-plan Roth conversion.”

What does that mean for you, and should you do it?

You may already have a portion of your 401(k) contributions set up for after-tax/Roth. If so, that amount is taken out of your paycheck after income taxes have been applied, so you won’t have to pay the tax later. The in-plan conversion gives you the opportunity to shift any pre-tax contributions into Roth as well. However, it means you’ll have to pay taxes on those earnings when you file your return for that year.

Let’s look at some pros and cons of doing a 401(k) Roth conversion.

401(k) Roth conversion – What you need to know

With an in-plan Roth conversion, the portion of pre-tax retirement savings that you convert to Roth will be considered taxable income. When and how much money you convert has important considerations.

Key advantages

  • Converting to Roth allows you to lock in tax rates today, which may be lower than you’ll have in the future. (When you retire, tax rates may be higher, and you might also find yourself in a higher tax bracket if you withdraw large amounts from your retirement savings. With Roth, you don’t have to worry about that.)
     
  • Investment growth on the Roth portion of your 401(k) is tax free.
     
  • There’s no fee to convert, you can convert money at any time, and for any amount of your pre-tax account balance. 
     
  • If you’re over 59-1/2, you can withdraw converted Roth assets tax-free without having to wait five years before you can access it. If you convert assets to Roth when you are under 59.5, those assets must stay in your account at least five years; for early withdrawal you'll pay a 10% penalty.

 

What to watch out for

  • When you convert pre-tax contributions to Roth, you’ll need to pay income taxes on that amount. For example, if you are a participant in the LANL TRIAD 401(k) and you convert $100K, you might have to pay $22K in taxes (which would vary based on your tax bracket and your specific financial circumstances).
     
  • If you’re under 59-1/2, you have to pay those taxes out of pocket. You can, instead, pay them from money in your 401(k), but you’ll also owe a 10% penalty tax. If you’re 59-1/2 or over, you can pay the taxes from your 401(k) with no penalty.
     
  • Be careful how much 401(k) savings you convert to Roth. The converted amount is added to your yearly income and could bump you into a higher tax bracket for that year. It might be better to wait until you retire (or work less) and are in a lower income bracket. Want to track your tax bracket?

 

Need help with your Los Alamos National Lab 401(k) strategy?

Making changes to your retirement savings can be a big decision, especially with a 401(k) Roth conversion. As an independent investment advisor representative of Lincoln Financial Securities, Zach Engraff can help you evaluate options, based on your unique situation.

Zach works with clients in both New Mexico and Colorado – and specializes in helping employees at the Los Alamos National Lab. You can learn more here – or schedule an initial consultation:


 
 
 
 
 
 
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