In-Plan Roth Conversion from Different Money Sources of Pre-tax 401K
Hi,
My 401K Plan has an option to do an in-plan Roth conversion from different money sources of a pre-tax 401K, e.g., EMPLOYEE PRE-TAX, EMPLOYER MATCHING CONTRIBUTION, and 401K ROLLOVERS. I can think of only one reason why one wants to choose money source to convert and that is each money source may be invested in different investment options, e.g. 401K rollovers may be in stock fund and employee pre-tax in bond fund. One can choose to convert 401K rollovers money source so that only the stock fund is converted to ROTH. Are there any other reasons to choose from different money sources to convert?
Thank you.
Permalink Submitted by William Tuttle on Thu, 2021-09-16 21:21
The funds the assets are in is not relevant. They can readibly be changed at any time.
The most likely reasons for selecting sources are their current taxation, future taxation and distributable nature.
The most common current use of IRRs is for employee after-tax contributions. That effectively moves them from the after-tax account with taxable earnings to the designated Roth account with tax-free earnings.
The other choice may be for taxable rollovers from pre-tax sub accounts to the designated Roth account during years with lower marginal tax rates.
The distributable nature is another important consideration.
The tax code and IRS regulations prohibit the in-service rollover of employee deferrals prior to age 59 1/2.
The tax code and IRS regulations allow but do not require the in-service rollover of employer contributions prior to age 59 1/2. Most plans have contribution aging, length of service and even age restrictions.
Most plans allow the in-service rollover of rollover contributions and employee after-tax contributions.