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QOTW: In-Plan Roth conversions
Roth conversions have been in the news lately spurred by a ProPublica story about Peter Thiel, founder of PayPal, having a Roth IRA worth $5 billion, followed by many articles discussing the pros and cons of Roth conversions. So last week we asked readers if their companies allow in-plan Roth conversions. A slim majority do not (43.8 percent), while nearly 40 percent do, and 17.5 percent are considering them.
Not Yet, Considering 17.5%
Our annual 401(k) plan survey has shown a rapid increase in the number of plans allowing Roth contributions the last few years and our latest data shows that three-quarters of plans now allow them. So why the difference in the percentage that allow Roth contributions and allow Roth in-plan conversions? The feedback is mixed – some are worried about participants not understanding the tax implications of a conversion, some are concerned about the administrative complexities, and some cite the lack of participant demand as reasons they do not offer it.
It could also simply be that the addition of Roth contributions came first and now that participants better understand Roth (though take-up rates are still relatively low with only a quarter of participants making Roth contributions when offered the opportunity) – we may see an increase in the availability of in-plan conversions over time, especially with the likely increase in participant demand stemming from the media buzz. We’re going to classify this a “trend-to-watch” for now.
[And be sure to participate in PSCA’s 64th Annual Survey by July 30 to get your free copy of the results later this year!]
Comments from those that allow in-plan Roth conversions:
• Its a little messy.
• Actually, it is going into effect 9/1 and is only available to those who contributed to the new non-deductible contribution option above the 401k limits. So, too soon to know!
• Execs love this feature
• Great addition for participants. Stress the importance of working with a tax/financial adviser as Roth contributions/conversions are still subject to RMDs and recharacterizations are not allowed. Tax implications in year of conversion. We also have After-Tax Contributions, so having the in-plan Roth conversion is a great feature. Roth conversion is allowed on all money types.
• Great feature for those interested.
• It's a great tax planning tool for participants. It makes the plan more attractive also.
• Not many people have taken advantage of it, but it is now offered.
• Our plan has offered it since 2018, but there are only a few participants who exercise this option despite it being widely communicated in our participant materials.
• They appear to be popular. Several participants have taken advantage of them since we put them in place.
• We have to keep a close watch on our annual NDT so we limit deferrals up to a max of 25% of base pay.
• We just recently added Roth contributions to our 403(b) plan, and we felt that those who were advocating for the Roth contributions would understand the implications of the in-plan conversion. The participant who wants one has to speak with a customer service representative to request it; they can't just do it online, and the hope is that the rep will make sure they understand what they are doing. We are also careful to point out when we get questions that their conversion will be fully taxable.
• We see as a feature really appreciated by our plan participants. Coupled with our traditional after-tax 401(k) we see this feature used a lot.