Thanks to the American Taxpayer Relief Act of 2012, most people now can convert their 401(k) accounts to Roth 401(k) accounts at any time. Internal Revenue Service formerly allowed this only if you changed jobs, retired or were at least 59-1/2 years old. Should you make the switch now?
Money that’s in a conventional 401(k) plan isn’t taxed until you withdraw it in retirement, but a Roth 401(k) plan flips that and taxes your savings now in exchange for tax-free withdrawals later. That means that the decision to switch depends largely on your tax bracket, says Jonathan Swartz, who is a partner at accounting firm Bennett Thrasher. Converting, say, a $100,000 401(k) account to a Roth 401(k) now means that you must account for $100,000 of extra income on your tax forms in 2013. If you’re in the highest tax bracket of your lifetime now, you likely will pay a higher percentage of tax on that money now than you would when you retire.