When the Roth IRA conversion rules changed, Internal Revenue Service regulations allowed taxpayers to choose whether to pay all the tax in 2010, or split it between tax years 2011 and 2012. The legislation passed this week didn’t include a similar specification on payment of taxes on conversions.
Fidelity Investments, the largest 401(k) plan provider, saw more than 355,000 Roth IRA conversions from January 2010 to June 2012, according to Deborah Pont, a spokeswoman for the Boston- based mutual-fund firm.
Vanguard Group Inc. saw 244,356 in conversions of traditional IRAs to Roth IRAs to in 2010, a 91 percent increase from 2009 before the income limits were lifted, according to Linda Wolohan, a spokeswoman for the Valley Forge, Pennsylvania- based firm.
The scope of possible conversions may be smaller at the start for 401(k) plans because only about half of employers in 2011 offered Roth accounts in their plans and most of those didn’t allow conversions, according to Vanguard.
Backing Off
Fewer than 2 percent of plans administered by Vanguard have opted to allow Roth 401(k) conversions and about 500 participants have taken advantage of the move since the 2010 legislation, said Jean Young, senior research analyst at Vanguard’s Center for Retirement Research.
“The thing to keep in mind is that when people do that type of conversion they have to pay a tax,” Young said. “When they realize they have to pay the taxes they tend to back off.”
A Roth conversion works best when an investor can pay the taxes with funds outside the 401(k) so as not to deplete savings in the account, said John Sweeney, executive vice president of planning and advisory services at Fidelity.
Investors who are near or at retirement with a 401(k) balance that is a large portion of their net worth that they need to spend in their remaining years rather than transfer to heirs shouldn’t make the conversion, Olivieri said.
“It will take a chunk of your other money and it will take you awhile to earn it back,” he said.