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Should I Convert My Retirement Plan into a Roth?

Ok, fellow readers, I’ve got a question for you. I think that Roth IRAs are the bomb, and my wife and I have had one ever since I learned about how cool they are. There is one problem with the Roth IRA though; that pesky $5,000 per year deposit limit [1].

Employer Options

At my work, however, we have a new option. I have a 457b [2] plan (much like a 401k, but you can begin withdrawals when you stop working, rather than waiting until the magical age of 59 1/2). I chose this over the 401k because of the ability to withdraw, without tax penalty [3], your balance if you ever leave service. You don’t have to wait until the full 401k age. And, you have the same contribution limits as the 401k [1], much higher than the Roth IRA.

My employer has offered a Roth version of the 401k [4], but again, I didn’t want the age limitation. Now they have the Roth option for 457b accounts. I’m certainly taking advantage of that by putting future contributions into a Roth 457b plan instead of the traditional 457b plan.

Should I Convert My Account into a Roth?

Here’s the weary query I put to you; should I convert my current 457b balance into a new Roth 457b account? Just like converting a traditional IRA to a Roth IRA [5], you have to pay taxes on the entire balance. On the plus side, there is no penalty to be paid.

So what do you think? Here are my options.

Option 1: Leave the account as is.

I could leave the money I have in my 457b, and just put future contributions into the new Roth 457b. The pro is that I don’t have to worry about paying a tax on a rollover; on the other hand, the money in the old 457b account will be taxable when I withdraw the funds in the future.

Option 2: Make the rollover, and pay the piper his due.

This is the option I’m leaning towards, but it’s definitely going to cost me. With a total of about $20,000 in the account, my employer will withhold about $7,500 for taxes (about 35%). After I do my taxes next year, the actual taxable amount will be closer to $3,000. Still, that’s a huge chunk of change. On the other hand, when I retire I won’t have any taxes to pay on withdrawals.

What would you do?

So I leave this question for you, readers: Which option would you choose? This is definitely an open question, with many variables missing, so I will give you a little more info. I’m 30-35 years old, and will be able to retire from my government job at 2/3 of my salary at the age of 55-60. I do not plan on working after retirement, and I plan on travelling a lot afterwards. I shouldn’t have any debt at retirement, except for a possible car payment. Any other government workers out there with this option?

More Retirement Planning Options