Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

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Monday, June 2, 2014

The Roth Dilemma

Roth ira

Using either a Roth IRA or Roth 401(k) for retirement accounts can have significant repercussions.  The goal of a Roth conversion is to reduce tax liability during retirement and can be achieved with either account; however, that is where the similarities end.  Yet, in order to fully achieve your client’s financial goals, it is the dissimilarities between the two Roth variations that can make a difference. 

An important characteristic of a Roth IRA conversion is that a client is able to undo the transaction through a recharacterization transaction that moves the funds back into the traditional account, eliminating the tax liability the initial conversion created.  This option is unavailable in a Roth 401(k).  Furthermore, a client converting to a Roth IRA is able to escape the IRS’ required minimum distribution rules so the funds in the account are permitted to grow tax-free over a longer period of time. 

Because of income limits that apply to Roth IRA contributions, postconversion contributions may be limited or blocked.  In 2014, the ability to make contributions to a Roth IRA begins to phase out for married couples with income over $181,000 ($114,00 for singles).  Thus, for high-income earners who wish to contribute directly to their Roth accounts after the conversion, a Roth 401(k) is the only option.  Stronger creditor protection rules apply to Roth 401(k) accounts and are protected by ERISA mandated federal creditor protection rules.

See William H. Byrnes and Robert Bloink, 401(k) vs. IRA: The Real Roth Conversion Question, Think Advisor, May 27, 2014. 

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Estate Planning - Generally, Income Tax, Non-Probate Assets | Permalink

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