Retirement planning is an essential part of any employee benefit program. As an employer, you have the responsibility of providing your employees with a comprehensive retirement savings plan. One of the options you may be considering is an in-plan Roth conversion. But is it the right choice for your company? Let's explore the benefits and drawbacks of offering an in-plan Roth conversion.
What is an in-plan Roth conversion?
An in-plan Roth conversion allows employees to convert their pre-tax retirement savings, such as traditional 401(k) contributions, into after-tax Roth contributions within their employer-sponsored retirement plan. The conversion requires the employee to pay taxes on the converted amount at their current tax rate, but future qualified withdrawals are tax-free.
The percentage of 401(k) plans to offer in-plan Roth conversions has been steadily increasing over the years. According to a survey conducted by the Plan Sponsor Council of America (PSCA) in 2021, 73.9% of 401(k) plans now offer in-plan Roth conversions, up from 69.4% in 2020 and 62.5% in 2019. This trend reflects the growing popularity of Roth contributions as a retirement savings option among employees, as well as the potential benefits of offering an in-plan Roth conversion for both employees and employers. However, it's worth noting that the availability of in-plan Roth conversions may vary depending on the size of the company, the plan sponsor, and other factors.
What are the benefits of offering an in-plan Roth conversion?
One of the most significant benefits of an in-plan Roth conversion is that it provides employees with tax-free withdrawals during retirement. Since Roth contributions are made with after-tax dollars, the earnings grow tax-free, and qualified withdrawals are not subject to income tax. This can be especially advantageous for employees who expect to be in a higher tax bracket during retirement.
Another benefit of Roth contributions is that they provide heirs with a tax-free inheritance. This can be particularly useful for employees who want to leave a legacy for their beneficiaries without subjecting them to a tax burden.
Offering an in-plan Roth conversion provides employees with flexibility in their retirement planning. They can choose to convert all or a portion of their pre-tax retirement savings to Roth contributions, depending on their financial goals and tax situation.
What are the drawbacks of offering an in-plan Roth conversion?
Offering an in-plan Roth conversion can come with administrative costs for the company, such as recordkeeping, plan amendments, and employee education. It's best to coordinate this change with other updates in the plan document so you only have to pay for one update!
Not all employees may be interested in converting their pre-tax contributions to after-tax Roth contributions. If participation rates are low, the administrative costs of offering an in-plan Roth conversion may not be justified.
Offering an in-plan Roth conversion can provide employees with significant benefits in their retirement planning. However, it's essential to weigh the potential benefits and drawbacks of offering an in-plan Roth conversion carefully. As an employer, you must consider the demographics of your employees, their retirement goals, and the financial resources of your company before deciding whether to offer an in-plan Roth conversion. Ultimately, the decision should align with your company's overall retirement plan strategy and goals.