As I stated before, one of the provisions of the \u201cfiscal cliff\u201d deal was a provision that allowed 401(k) plan participants to convert their pre-tax salary into a post-tax Roth 401(k) deferrals that will be distributed tax free at retirement. All that\u2019s required is that the participant\u2019s employer\u2019s plan offers the Roth feature. Only 40 to 50% of all 401(k) plans have that Roth feature.<\/p>\n
So the only requirement to make the conversion is that the employer plan have that Roth feature. Previous law only allowed Roth 401(k) conversions for participants with so-called “distributable” funds, a relatively small group that mainly included people 59 1\/2 and older.<\/p>\n
Why did the government allow this provision under the euphemistically titled American Taxpayer Relief Act of 2012? Well, it\u2019s a gimmick to raise revenue because if a participant converts from pre-tax deferrals to post-tax deferrals, a tax bill is due. These conversions are a financial gimmick to get a boost of tax revenue now, and not worry that retirees may get tax free treatment at retirement later. It\u2019s called kicking the can and that\u2019s what the Federal Government does as I still notice that Social Security will run out of money the year before I\u2019m supposed to collect my benefits.<\/p>\n
This gimmick of Roth 401(k) conversions is supposed to raise $12 billion over the next 10 years. Here\u2019s three reasons why it won\u2019t:<\/p>\n
As with any gimmick, there are some benefits to it and if I had $5 to my name, I\u2019d consider it. The problem is that most 401(k) plan participants won\u2019t and the government won\u2019t get the revenue they think they will get.<\/p>\n
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