March 29, 2024

Bucks Blog: More Flexibility Added for Roth 401(k) Conversions

The new fiscal bill, the American Taxpayer Relief Act of 2012, includes a provision that adds more flexibility to Roth retirement accounts.

Now, individuals can convert their existing 401(k) retirement plan to a Roth 401(k)– assuming their employer offers the Roth version, and allows conversions — regardless of whether they are eligible to take distributions out of the plan.

Previous rules allowed conversion from a 401(k) plan to a Roth version only if you were eligible to take funds out of the account. That meant, in general, that you had to be 59 and a half, dead, disabled or had left the employer (unless the plan allowed “in service” withdrawals), said Michael Kitces, a financial planner who summarized the change in his blog.

“It wasn’t very useful for most people,” he said. But now, he added, “Even if you still work there, and are younger than 59 and a half, you can do conversions.”

Investors who convert from a traditional, tax-deferred account to a Roth account do so because they have decided it’s preferable to pay taxes on their contributions now and avoid paying them later, when tax rates are likely to be higher. (Employee contributions to Roth 401(k)’s are taxable, but withdrawals are tax free.)

Essentially, Mr. Kitces said in his blog, the new rule means you can now do “intra-plan” 401(k) conversions “from traditional to Roth in the same manner you can do so for I.R.A.’s.”

The change doesn’t necessarily mean there will be a rush of people converting their 401(k)’s, he said. For one thing, your employer has to offer Roth 401(k)’s. (About 40 percent of employers do, according to the benefits consultants Aon Hewitt.) And as with I.R.A. conversions, you have to have the money to pay the taxes on the conversion. “We certainly expect to see some people take advantage,” he said, “but don’t expect an onslaught of conversions due to this provision.”

Alison Borland, vice president for retirement solutions and strategies at Aon Hewitt, noted that it’s optional for companies to offer Roth 401(k) plans, and it’s also optional for them to offer conversions. But the new rules may make conversions more compelling to employees, she said, so there may be more incentive for companies to allow them.

Previously, she said, the amount to be converted was subject to annual limitations on retirement plan withdrawals, which can vary by employer. But under the new provision, she said, employees can convert the entire balance in their plan to the Roth version.

“I do think this will give more plan sponsors a reason to add it,” she said. She also noted that companies will probably need additional guidance from the I.R.S. before they actually begin to allow conversions.

Would you consider converting your 401(k) to a Roth version, if you’re given the opportunity?

Article source: http://bucks.blogs.nytimes.com/2013/01/03/more-flexibility-added-for-roth-401k-conversions/?partner=rss&emc=rss

Bucks Blog: A Credit and Debit Card: 2 Cards in One

Courtesy Fifth Third Bank

It’s one of those things that makes you wonder why it wasn’t available before. Fifth Third Bank has just introduced Duo, a piece of plastic that works as both a debit card and a credit card.

Fifth Third, based in Cincinnati, says that while various institutions have been testing the cards, it is the first to formally offer it to consumers. Research with its own customers suggested that there was a significant demand for the two-in-one cards, said Stephanie Honan, a spokeswoman for Fifth Third. Many customers use both type of cards — debit for smaller purchases, say, and credit for larger purchases they want to pay off over time. So, she said, customers like the idea of being able to choose credit or debit while carrying just one card.

Here’s how it works: First, you have to have a checking account at Fifth Third, since debit cards are linked to checking accounts. Then, if you want, you can apply for the Duo card, just as you would apply for any credit card.

When you go shopping, you decide how you want to use the card at checkout. After you swipe the card, the terminal prompts you to choose “credit” or “debit.” If you select debit, you type in your PIN, and the funds are withdrawn from your checking account.

If you choose credit, you sign for the purchase, and the cost of the item is charged to your line of credit.

As long as you choose credit, you can earn rewards points for your purchases.

(Unlike some multiuse cards that have been tested, however, Duo does not offer the option of paying directly with rewards points. Citibank has been testing such a credit card — called 2G, for second generation — and had been scheduled to make it widely available sometime this year. A bank spokeswoman did not immediately respond to a request for an update on its plans.)

While the Duo cards offer flexibility, you do have to pay attention. If you somehow make a mistake, and hit “debit” when you do not have enough funds in your checking account for the purchase, the item will be covered by overdraft protection — and you’ll pay an associated fee.

The move may also benefit banks in another way, says an analyst’s report from Barclays Capital. The report suggests the dual-use cards, which do not offer a signature debit option, represent a move by banks to encourage more use of credit, rather than signature debit, because signature debit transactions have been cited by the Federal Reserve as having higher fraud costs than the PIN version. “As a result, we believe that banks are beginning to explore steering customers toward credit card transactions in place of signature debit transactions,” the report from the analyst, Darrin Peller, said.

Does a dual credit and debit card make sense to you? Would you find such a card useful?

Article source: http://feeds.nytimes.com/click.phdo?i=76e779c32cb74aaf34baf01f3671f03f