Add one more item to your annual tax review: Should you convert 401k plan assets to ROTH 401k assets? Conversion means paying taxes now in exchange for tax-free withdrawals in the future. Money left to beneficiaries in ROTH accounts could grow into a small fortune for the next generation.
Prior to enactment of the American Taxpayer Relief Act, individuals could perform ROTH conversions on their contributions subject to several restrictions and conditions Congress eased up on the reins (taking from their grandchildren in the process.) If your 401k plan has a ROTH option, you’ll probably be able to conversion.
But should you?
Like investments, tax planning contains an element of the unknown. Several folks we know sold assets in 2012 to capture lower capital gains rates which were ultimately extended for most (though not all) tax payers. Optimal situations to consider conversion may be years when your income falls or if you have very low income taxes. In those cases you may want to “Use up” your lower income tax bracket.
The main take away is that if you are eligible, you’ll need to consider this option going forward.