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Can I Convert a 401k to a Roth 401k?

The 401k is a type of retirement account that allows you to save on a pre-tax basis for your retirement needs. Another option that some employers offer is the Roth 401k which allows you to save on an after-tax basis and then avoid paying taxes during retirement. If you already have a 401k, you could potentially switch over to the Roth 401k.


401k to a Roth 401k


Converting to a Roth

When you already have a 401k from your employer, your employer might decide to offer a Roth 401k option. If this is the case, you typically have the option to switch over to this type of account. When you want to do this, you will usually have to simply fill out a form with your employer’s 401k provider.

Then the money will be switched over to the Roth 401k. Once the money is in this account, you will not have to pay taxes on the gains from your account.


Tax Requirements

Even though converting over to a Roth 401k can provide the opportunity to save money on taxes in the future, it causes you to have to pay taxes now. When you switch over to a Roth 401k, the amount of money you move has to have taxes paid on it.

Since you funded your traditional 401k with pre-tax money, this money has never had taxes paid on it before. The money that you convert will be added to your taxable income for the year and you will pay taxes on it at your regular marginal tax rate.


Paying the Taxes

Coming up with the money to pay the taxes for a Roth 401k conversion can be a problem. In some cases, you may consider using the money from your 401k to pay the taxes. When you do this, it can take a big chunk out of your retirement savings. Instead of using the money from your 401k, it would be to your advantage to pay the taxes with money from some other source. Depending on how large your account balance is, this could be a sizable investment.


Tax Brackets

You may consider transferring your money over to a Roth 401k because you believe it will help your tax situation in the future. For example, if you believe your tax bracket will be higher in retirement than it currently is, it can make sense to get the taxes out of the way up front.

Many people believe that tax rates will be higher in the future and having your taxes taken care of can be a big advantage.


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