One of the less-noticed provisions passed by Congress to avert the fiscal cliff makes a significant change to Roth 401k plans. Most workers, provided their company offers a conversion option, will now be able to pay taxes on retirement savings in advance.
Unlike traditional 401k plans, which allow employees to put away retirement money tax-free now and pay regular income taxes on money withdrawn in retirement, a Roth 401k (similar to a Roth IRA structured plan) gives workers the option to pay income taxes on retirements savings now, and be able to withdraw those funds tax-free in retirement. When Roth 401k plans were first authorized in 2010, only those workers aged 59 1/2 or older could choose the option to pay taxes on the front end, and few companies offered the conversion. The new authoriztion is intended to bring more revenue into government coffers more quickly.
Specifics about conversion rules are still being developed but letting your audience know about the change today will give them a chance to consult their financial advisor and begin planning.
CNN Money reported on the change to the rules passed earlier in January. CBS MoneyWatch reported on the original announcment of the formation of Roth 401k plans.
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