The Roth 401k can be a very effective generator of tax free retirement income. In this video, John discusses some seriously important factors.
Transcript: Hi, this is John Park with PGI Self-Directed and contributor for BawldGuy Talking. Today’s video post, we’re going to be talking about the world of Roth 401K’s and what does means to you and the power associated with them. First of all, it all lies in the power of the documents. What does that mean? Well, bottom line is, is there a difference between what the IRS says you can do and then maybe what the plan documents of your 401K plan allow? Under the regulations, not only can your plan do Roth contributions, it can also do Roth conversions, and because of the fiscal cliff legislation just enacted in January. It can now also allow the conversion to Roth funds of employer contributed funds, things typically such as profit share. Let’s go back to contributions. First of all, your plan documents have to allow it. Now, with a regular company out there with its regular 401K plan its documents may or may not allow it. You could go in to your HR person and say, “I want to start making Roth contributions and I want to do it now and some guy on the internet told me I could.” After he or she is done laughing, one of thing then may says, “Our plan documents don’t permit it.” There’s nothing as the employee that you can do. Since I’m here to talk about self administered 401K plans, our plan documents do allow Roth contributions. It gives you a vast array of freedom to make those contributions, however you see fit. You still have to keep within the annual contribution limits set by the IRS, but if you said, “John, can I make those Roth contributions, all my employee deferrals be Roth?” Absolutely, you said, “Can I make them all pre-tax or traditional?” Absolutely, “Can I do a combination of the two?” Absolutely, as long as the total amount contributed by the employee does not surpass the annual limits. Now, let’s also go to conversion. With the Roth conversion, again, if the plan documents allow it and our documents do. You can take any pre-taxed funds within your 401K, your self-administered 401K and convert those to Roth dollars. That’s huge and that’s powerful. You always have to make sure within your 401K plan that you have designated Roth accounts because you might have pre-tax funds in your account. You may also have 401K Roth funds in your account. You have to keep them separate for obvious reasons. Number three is the whole concept of the conversion of Roth funds that your employer puts in. Even as a self-employed person you might be putting in profit share contributions which initially are going to be going in pre-tax. You can, based on the fiscal cliff legislation, covert those to Roth dollars, but a word of caution. This is brand new legislation. It really hasn’t been fully decided by the IRS how that mechanism is to work? Before you get all crazy about employer contributions and converting them into Roth, you might want to wait for a little bit more to come out on that subject matter, but the whole process of being able to do that was approved with the fiscal cliff legislation. This is in my opinion a great and powerful tool. It’s one of the shorter videos I’ll probably ever do but it’s there to educate you that you cannot only do the Roth contributions, you can do the conversions, and heck, you got to do it right, but you’re also going to be able to do the employer Roth conversions as well. With that, again, John Park, PGI Self-Directed and I look forward to seeing you on the next post.