Fiscal Cliff Deal Hides a 401(k) Bonus

Fiscal Cliff 401 (k)No one in the middle class was celebrating the two percent bump in taxes they'll be forking over under the new fiscal cliff deal.

But here's something to help soften the blow: Buried deep in the American Taxpayer Relief Act is a provision that lets a lot more workers convert their traditional 401(k) savings account into a Roth 401(k).

Drawing a blank?

Unlike a traditional 401(k), which people contribute to now and only pay taxes on withdrawals in retirement, a Roth 401(k) does just the opposite. Workers pay today's tax rate on their contributions, then are able to withdraw them tax-free in the future.

The Roth 401(k) has been around for more than a decade, but old tax laws blocked workers younger than 59½ from making the switch. Thanks to the new deal, that little stipulation will be gone in a few months, and the government is banking on the fact that they'll pocket a ton of new tax revenue when workers scramble to convert.

Now, you've just got one question to answer: Should you convert?

First of all, this requires a bit of guess work, which is why the answer is different for everyone. If you think you'll be in a higher tax bracket later in life, then it makes sense to convert to a Roth 401(k) now, pay lower taxes on your money at your current rate and then enjoy it tax-free later in life.

That's why most finance experts push Roth IRAs and 401(k)s for young workers, since they typically will move up in their careers and earn more with time.

In his book, "Worth It ... Not Worth It?," personal finance journalist Jack Otter sums it up nicely:

By making the maximum contribution to a Roth you are saving more money for retirement than if you max out a traditional IRA. Why? Because you are paying the tax now, and you'll get to keep 100 cents of every dollar in that account. With a traditional IRA, you'll have to give 10 or 20 or 25 cents of every dollar to Uncle Sam as you make withdrawals.

On the other hand, there are workers who shouldn't bother converting -- namely, those who expect they'll be in a lower tax bracket when they retire than they are today.

And then there are those workers who've contributed so much to their savings plan that the thought of converting to a Roth and paying a huge chunk of change upfront can't help but sting.

"It's a common concern that keeps some IRA owners from making the switch. "Can you imagine someone has a $300,000 IRA and right upfront they're giving up $75,000 of that IRA?" chartered financial consultant Mike Piershale, retirement expert and president of Piershale Financial Group, told BI. "[A Roth IRA conversion may] look good on paper when you're running a pure math calculation but in the real world, a lot of things happen."

To that end, the answer may be a partial conversion. So long as this new law sticks for a while, all workers will be able to convert a Roth each year. Calculate yourself (or with the help of an expert) how much you can afford to pay in taxes today, and then slowly move over funds annually until you're satisfied.

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It's bushes fault wait till ob care kicks in everyone will be real happy lol

January 16 2013 at 12:32 PM Report abuse rate up rate down Reply

What is the 'Deal' here? Article states there is an included 'Deal'? One could convert 401K to Roth before? What incentive exists now that did not before? Same current tax vrs future tax comparison. I understand that surviving wives can roll over a husband's Roth for their full life before any next generation is required to make withdrawals all tax paid. Any comments appreciated, but see no new benefit in this article that is newsworthy.

January 16 2013 at 11:00 AM Report abuse rate up rate down Reply

GOOD for you ?..............Obamie gets more tax money to spend NOW......20 years from now your children still trying to pay for his spending even harder

January 16 2013 at 8:57 AM Report abuse rate up rate down Reply

Yeah, right.

January 16 2013 at 6:58 AM Report abuse +1 rate up rate down Reply

What? Democrats want to GIVE something to taxpayers? That can't possibly be true!

January 16 2013 at 6:13 AM Report abuse +3 rate up rate down Reply

What? Democrats want to GIVE something instead of taking? Impossible!

January 16 2013 at 6:12 AM Report abuse +2 rate up rate down Reply
1 reply to jrb359's comment

thet are not giving's taking your tax dollors NOW!

January 16 2013 at 8:58 AM Report abuse rate up rate down Reply

When i saw "Hidden Bonus" got all excited...........................I thought BOBO was going to resign.

January 16 2013 at 5:25 AM Report abuse +4 rate up rate down Reply

... they obviously have something to gain from this bonus... more up front taxes on money that will be worthless later. EVERYONE should be pulling their 401K money out NOW and buying assests that can be inflated when the dollar is completely destroyed. My suggestion is to use it to load up on FOOD and GUNS...

January 16 2013 at 2:01 AM Report abuse +4 rate up rate down Reply
Mr. Needles Ca.


January 16 2013 at 1:07 AM Report abuse +5 rate up rate down Reply
1 reply to Mr. Needles Ca.'s comment

Yes, its the only thing that can save us. He doesn't belong there.,,,,Voter fraud.

January 16 2013 at 8:28 AM Report abuse +1 rate up rate down Reply

Does it matter? They won't rest till they get it all; they will borrow and print until it's worthless. The debt will be more than we can ever pay back, the rich rule over the poor, and the borrower is slave to the lender. We let our leaders enslave us with our own money, they won't spend how we vote, but we are saddled with the debt, they spend 146% of what they take in, and ask to borrow in 1.3 trillion dollar chunks, they can't burry us fast enough. they can't spend what they take from us for social security fast enough, but there is always a silver lining, you can choose to look at the bright side, And thats eventualy you will Die.

January 15 2013 at 10:34 PM Report abuse +2 rate up rate down Reply