Roth Conversions: Should You Foot the Tax Bill Now?

July 22, 2015

We’ve talked about Roth contributions on the Dime before -- also known as “the never-ending conundrum of whether to pay taxes now or pay them later.” (Here's a refresher course.)

Now consider another possibility: the Roth conversion. Not only do many employer plans now accept Roth contributions directly from your paycheck, you may also have the option to convert pre-tax money that’s already in the plan to Roth money. As long as you have the time to leave the converted Roth money in the plan for at least 5 years, and you take the money out after you turn 59 ½ (or if you are disabled), you won’t be taxed on the earnings of the converted amounts.

When you convert your money to Roth, you will be taxed on all of the money you convert in that year, so you may not want to convert it all at once. After the money is converted to Roth, you cannot change it back to pre-tax. This is different for Roth IRAs, because in an IRA you can undo the decision to change your pre-tax money to Roth (in other words, in an IRA you can change the money back to pre-tax).

So what about tax penalties if you want to do a conversion, but are too young to take a distribution? Usually, if money comes out of a retirement plan and you are under age 59 ½ you are subject to a 10% additional tax on the “early distribution.” (Note: This 10% tax does not apply to 457 plans.) A Roth conversion is not subject to that 10% additional tax, but you need to leave the converted money in the plan for at least 5 years or you will be subject to a 10% “recapture” tax (unless an exception applies).

You can typically convert any pre-tax dollars to Roth. Your employer’s plan may have rules on which money may be converted, so be sure to check before making plans.

If you are a PERA member, Roth contributions in the PERAPlus 401(k) and 457 plans are up and running. Employers have to add this feature so you can make Roth contributions—so if your employer hasn’t yet adopted the Roth option, let them know that you want it!

Both the PERAPlus 401(k) and 457 plans allow Roth conversions. PERA allows you to make up to two pre-tax to Roth conversions per year. Note that you cannot use Roth money to purchase service credit in the PERA Defined Benefit Plan, so be sure to think about that before you decide on a Roth conversion. Remember, once you’ve completed the conversion, it cannot be undone.

Conversions are a great opportunity for many people. Just make sure you know what you are getting into so you are not surprised by a large tax bill for the year. You may want to talk to a tax professional before making this decision so that you understand all implications.

This post was written by Megan Westberg, a Staff Attorney at Colorado PERA. Would you like to write a guest post for The Dime? Email us at