The tax advantage alone is reason enough to think about converting your existing employee retirement savings plan to a Roth individual retirement account. Roth IRA money is taxed at your current income level when you contribute it, but it grows tax-free, and distributions at retirement are tax-exempt. Conversion options are usually available, but they do vary with the type of plan.
Check the Plan
Check with the administrator of your current plan about converting to a Roth. You may learn something that could have a major impact on your decision. You may find out it's not possible. Some savings programs won't allow you to take anything out until you leave the job or turn 59 1/2. Even if you can do it, some plans limit the money you can withdraw to whatever you put into the plan. That means you'll lose the employer contribution if you convert to a Roth.
You'll have to pay taxes at your current rate on any money you convert from some program like a 401(k) to a Roth IRA. Roth money is always taxed when it's put into the account, while a 401(k) or similar program defers taxes until you retire. Roth funds are taxed when they're put in, but not at retirement. You may be able to split withdrawals over several tax years to ease that burden.
In general, you can convert any 401, 403 or 457 government deferred compensation plan to a Roth IRA unless the plan has a "no Roth-IRA rollover" prohibition. If your plan nixes a direct conversion, you can convert your existing account to a traditional IRA, then switch that into a Roth.
If you've got a traditional IRA in a plan that also offers a Roth option, you can change the regular IRA to a Roth and spread the tax liability over two years. If your existing plan has pre- and after-tax contributions, you'll need to prorate taxes for the conversion. If the existing account has $10,000, and $5,000 was contributed after taxes were paid, you'll end up paying current income tax on half of the account.
- My Federal Retirement: Should Federal Employees Consider a Roth IRA Conversion?
- Fed Smith: Unique Roth IRA Conversions for Federal Employees
- Fidelity: Answers to Common Roth Conversion Questions
- McDonald-Hopkins: Intra–Plan Roth Conversions
- TD Ameritrade: Roth IRA Conversions
- Good Financial Cents: Can You Rollover Your 401k to a Roth IRA?
- NOLA.com: Now Might be the Time to Convert to a Roth IRA