A little-noticed provision of a law signed by President Obama this month promises to boost the use of Roth accounts in workplace retirement plans.
The Small Business Jobs Act really has very little to do with retirement saving -- it's aimed at boosting the economy by giving tax cuts and credits to small businesses. But those cuts and credits come with a $12 billion price tag, which the law attempts to offset with a revenue-raising provision that vastly expands the opportunity to convert tax-sheltered retirement savings to Roth accounts.
Unlike tax-deferred accounts, retirement savers use Roths to avoid taxes on investment income down the road by paying income taxes upfront. They're great for people in lower tax brackets, and for wealthy individuals who want to sock away as much as they can now.
Previously, rollovers were limited to Roth IRAs, and people younger than age 59 ½ generally could do it only when leaving a job.
All limits on income for Roth conversions were removed this year under separate legislation; the new law now makes it possible for anyone to do a conversion with workplace savings, regardless of age. "This law makes tens of millions of people, in essence, eligible for conversion without having to quit their job to do it," says Dallas Salisbury, president of the Employee Benefit Research Institute.
How do Roth conversions raise revenue? Remember that any funds coming out of a Roth count as taxable income in the year of conversion. The Roth provision -- along with some other retirement-related provisions -- is intended to offset that by raising $6.6 billion in expected new income tax revenue.