Can I convert money in my 401(k) to a Roth 401(k) while I'm
still working at my job?
Until this year, you generally couldn't make the conversion
while you were still working for the employer who sponsors your
plan. But now the law has changed to permit the transfers. You can
convert some or all of the money in your 401(k) to a Roth 401(k).
If you do, you'll have to pay taxes on that money for the year you
make the conversion. But you can withdraw Roth 401(k) money
tax-free in retirement, as you would with a Roth IRA.
Although rollovers are permitted, not all employers offer the
option yet. Only about 34% of the 401(k) plans administered by
Fidelity offer Roth 401(k)s, for example, and only 12% of those
plans have been amended to permit these in-plan conversions. Ask
your plan administrator if you can make this move and, if so, what
steps you'd need to take. Fidelity, for example, currently permits
the conversion only over the phone, rather than online, so its
representatives can explain the tax implications.
"The transaction itself is simple, but you want to make sure
you're planning for the fact that you'll be hit with a pretty large
tax liability," says Donna Norwood, senior vice-president of
Fidelity. Be sure you have enough money outside of the account to
pay the tax bill, so you don't have to pay an early-withdrawal
penalty to get the cash.
Converting some money in your 401(k) to a Roth 401(k) can be a
good opportunity to have some tax-free income available in
retirement, especially if most of your retirement savings are in a
tax-deferred account with your current employer. "We always talk
about being diversified among the asset classes in your plan, but
it also helps to be tax-diversified," says Norwood.
The decision to convert money from a 401(k) to a Roth 401(k) is
similar to the decision to convert from a traditional to a Roth IRA
(although, unlike with IRAs, you can't "recharacterize" a Roth
401(k) conversion and switch that money back to a traditional
401(k) later). See
7 Myths About Roth IRA Conversions
Should You Convert to a Roth IRA?
for more information about the conversion decision.