Christine Benz: So Ed, one last question for you, part of the Small Business Jobs Act of 2010, actually allows 401(k) and 403(b) participants to take part of their traditional balances and convert them to Roth status. Can you talk about whether that's a good maneuver and what you need to know about that?
Ed Slott: First, I'll talk about, first that part is not new, there could always, since actually 2008 convert to a Roth. What was new in the Jobs Act, you could just keep the money in the plan if you wanted to, in other words, you could convert if the plan had it from a 401(k) to a Roth 401(k) in the plan without going outside the plan to a Roth IRA, or you could convert from a 403(b) to a Roth 403(b) in the plan.
So, that might be a good move, but there is one caveat there that most people are not aware of. I talked about one of the big benefits of a Roth conversion is that you could undo it, recharacterize it. If you do that conversion in the plan, you can't recharacterize it, so to me that's a big disadvantage. So, I think most people if they want to convert are probably better off not using that provision. And if they want to convert from their 401(k) convert it directly to a Roth IRA and get it out of the plan just because you don't have a chance to undo it, but there are benefits to leaving it in the plan, and these are things you'll have to discuss with your advisor if they have the knowledge in this area. Because one thing plans have is they have creditor protection, which is a big deal to some people, executives, medical people who are worried about may be being sued. So that's an advantage of leaving it in the plan but most people I think would be better off getting it in out of the plan and in their own Roth IRA. They have better investment options and the ability to undo it if it doesn't work out and I think that was unfortunate that didn't get in the law.
Benz: So one last follow-up on that not just anyone can do that in plan conversion right, it's limited to certain individuals?
Slott: Anybody can do it if as long as their company has a Roth 401(k). But not every company does and they have to have it to do it. There is no income limits or anything like that. So anybody that works for a company you might want to ask we have a 401(k) did you set up a Roth 401(k).
More companies are setting them up. They only started in 2006 so it's a little slow going but as more and more employees ask big companies they would rather put it in a Roth 401(k) than a 401(k). This is for people that didn't have a Roth 401(k) in the plan. They were contributing to a 401(k) and now they set up a Roth 401(k) so they have an opportunity to move it to the Roth 401(k) but if they are going to move it to a Roth 401(k) you probably better off moving it to a Roth IRA. When I say anybody can do it anybody that has a Roth 401(k) option in the plan but you still have to be eligible for a distribution from the plan not everybody is eligible. Normally you have to be 59 1/2 or retired to move it out of the plan into a Roth IRA but you've to ask your company each plan has different rules.
Benz: Well, Ed thanks so much for sharing your wealth of insights. We really appreciate you being here with us today.
Slott: Glad to be here. Yeah, a lot of information there. That's why Roth conversion, a big year for Roth conversions.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com