This past week Congress passed the Small Business Jobs Act Of 2010. While there were many interesting parts to the bill including changes to how employee cell phones are viewed and accelerated write offs for business owners, one of the very intriguing parts to the bill is the conversion of your existing 401(k), 403(b), or 457 retirement plan.

If your employer has a Roth 401(k) provision, (which if they do not currently you should really complain to your HR or Benefits person) you may be eligible for a potentially good long term tax management idea. Generally your employer must have a Roth 401(k) source in the plan, allow in-service withdrawals, allow rollovers, and have the Roth provision in the plan to be able to take advantage of a conversion.

2010 is an especially meaningful year because no matter what level your income is this year, you can convert some or all of your 401(k) (403(b), 457) over to a Roth 401(k). The Government this year will allow you to pay taxes on that entire amount this year in 2010, or defer paying taxation by including half of the taxable amount in 2011 and half in 2012. (source: www.irs.gov).

Most people believe that taxes have nowhere to go up over the long term.  Based upon your individual tax situation and time frame until you need this money, you can decide to deploy a tax strategy to pay now and withdraw all of your earnings tax-free into the future.  Since most high wage earners could not even contribute to a Roth IRA, the passage of this Small Business Jobs Act Of 2010 now makes 2010 a special year to potentially convert both IRA and 401(k) money over to the Roth.

Nobody truly knows the future of where your specific tax rate will be in 10, 15, or 20 years from now.  However, building a tax management strategy that allows you to control your future taxation by having buckets of money with different tax liability when you distribute income down the road is not something most people consider in their accumulation years. With three months left in the year, it will be crucial that you do this analysis.

Spend some time before year end to see if this strategy makes sense for you. You can check out our Roth Conversion calculator.

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Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®
Co-CEO and Founder oXYGen Financial, Inc.

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oXYGen Financial, Inc. co-CEO Ted Jenkin  is one of the top foremost knowledgeable professionals in giving financial advice to the X and Y Generation.

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