Roth 401k, Pre-Tax 401k, Or Both?

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PSI Newsletter and Website Header 10.2.15

 By Robert C. Lawton, AIF, CRPS, President, Lawton Retirement Plan Consultants, LLC

401k plan participants often wonder whether they should contribute their hard-earned money to a Roth 401k or a pre-tax 401k account. Depending on their age and tax bracket, the answer may be both!

Many 401k plan participants have the option of making pre-tax 401k contributions and Roth 401k after-tax contributions. Roth 401k contributions (along with all accumulated earnings) can be withdrawn tax-free if distributed due to a qualifying event from a Roth 401k account that has been in existence for at least five years.

Pre-tax 401k contributions (and the associated earnings) are taxable when removed from a 401k plan. I have found that 401k participants are generally unclear on how they should choose between these two options. Following are some thoughts. [Read more…]

Should 401k Plan Sponsors Worry About The Roth Promise?

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PSI Newsletter and Website Header 10.2.15

By Robert C. Lawton, AIF, CRPS, President, Lawton Retirement Plan Consultants, LLC

Whenever I talk with 401k plan sponsors or participants about making Roth 401k contributions, at least half of them tell me they would never do it. They all cite the same reason. They don’t trust the federal government to keep its Roth 401k promise to allow tax-free distribution of Roth balances. I think they are wrong — not about trusting Uncle Sam, but about whether the government will keep its Roth 401k promise. [Read more…]

401k Executive Benefit Opportunity Results From Weak Markets

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PSI Newsletter and Website Header 10.2.15

By Robert C. Lawton, AIF, CRPS, President, Lawton Retirement Plan Consultants, LLC

The bad equity markets have one silver lining for those executives in your organization that might have large 401k account balances: In-plan Roth 401k conversions.

Why now?

Most of us have experienced significant declines in the value of our 401k account balances as a result of weak equity markets. For executives, these losses may have been even greater if they had a well diversified 401k account with a heavy allocation to equities and exposure to commodities. These executives may have unrealized losses in their accounts of as much as 20% or 30%.

Converting pre-tax 401k balances into after-tax Roth 401k balances results in taxation of the previously tax-free amounts. Converting when the account value is lower may result in a substantial tax savings. Following is an example.

Example of in-plan Roth 401k conversions [Read more…]

Hottest 401k Plan Enhancement For Your Executives

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PSI Newsletter and Website Header 10.2.15
By Robert C. Lawton, AIF, CRPS, President, Lawton Retirement Plan Consultants, LLC

Whether you sponsor a large or small 401k plan, the addition of a Roth in-plan conversion feature may be viewed by your executives as an important tax planning tool. A major benefit of Roth accounts is that vested balances residing in the accounts for five or more years may be withdrawn tax-free (contributions and earnings) when a distributable event occurs.

A Roth in-plan conversion option is a unique tax planning tool. Roth 401k accounts are the only investments I can think of where the investor has control over when an investment is taxed, without actually having to liquidate the investment! Normally, taxation on an investment is triggered when it is sold, not re-characterized into a different account or form. Consider these other reasons to offer a Roth in-plan conversion feature in your 401k plan: [Read more…]

Hottest 401k Plan Improvement

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PSI Newsletter and Website Header 10.2.15
By Robert C. Lawton, AIF, CRPS, President, Lawton Retirement Plan Consultants, LLC

Looking for a hot 401k improvement for your 401k plan this year? Many employer plan sponsors are expressing a high level of interest in adding Roth 401k in-plan conversions as an option to their 401k plans. The Taxpayer Relief Act of 2012 made it possible for 401k plan participants to convert existing 401k plan balances into Roth 401k balances, whether or not the participant is distribution eligible.

The benefits? All contributions and earnings that have been in the plan 5 years after the Roth clock starts are distributable tax-free (assuming they are distributed due to an eligible event). The cost? It is necessary to pay taxes on any 401k balances converted into Roth 401k balances in the year of conversion. [Read more…]