In-plan Roth conversion - How it works, benefits, taxes

What is an in-plan Roth conversion?

An in-plan Roth conversion allows you to transfer eligible pre-tax savings in your MNDCP account to Roth after-tax savings within your MNDCP. This conversion — also known as an in-plan Roth rollover — is treated as a distribution for tax purposes, even though the funds never leave your MNDCP account.

If you choose to convert your pre-tax savings to Roth, the conversion amount is subject to income taxes in the year of the conversion but any future earnings can be withdrawn tax-free, as long as the Roth account was held for five years and you are at least age 59½.

Any MNDCP participant may request an in-plan Roth conversion.
 

Benefits of an in-plan Roth conversion

If you expect to be in a higher tax bracket in the future, an in-plan Roth conversation could be a useful strategy to lower your future tax liability. The key benefits of a Roth conversion include:

  • Tax-free potential growth: Once you have paid any applicable taxes on the conversion amount, any future growth and qualified withdrawals are tax-free as long as the Roth account was held for five years and you are at least age 59½.
     
  • No Roth RMDs: Unlike the pre-tax savings in your MNDCP account, any Roth savings are not subject to required minimum distributions (RMD) until after your death.
     
  • Diversification: Having both pre-tax and Roth after-tax savings  can provide more flexibility for managing your tax liability in your retirement years.
     
  • Estate planning: Roth accounts can be a useful tool for estate planning as they can be passed on to heirs tax-free.
     
  • Lower taxable income in retirement: Withdrawals from a Roth account do not count towards your taxable income, which could help you stay within a lower tax bracket during retirement.
     

Paying taxes on an in-plan Roth conversion

An in-plan Roth conversion is a taxable event that you must report on your income tax returns. If you elect to make an in-plan Roth conversion from your MNDCP account, the conversion is treated as ordinary income and subject to tax. You are responsible for paying any income tax due on the conversion amount. MSRS will not withhold federal or state income tax on your conversion amount. In January of the year following your conversion, MSRS will report the conversion amount as taxable income on Tax Form 1099-R.
 

Considerations of an in-plan Roth conversion

  • Immediate Tax Bill: A large conversion could significantly increase your taxable income, potentially pushing you into a higher tax bracket.
     
  • Cash Flow Needed: The taxes due on the conversion should ideally be paid with funds outside your MNDCP account, not the converted amount itself, which requires extra cash on hand.
     
  • Impact on Benefits: Higher taxable income can trigger IRMAA charges (higher Medicare premiums) and make Social Security benefits taxable.
     
  • No Reversal: Under federal law, once an in-plan Roth conversion is processed, it is irrevocable and can't be undone or recharacterized so make sure you're aware of the tax consequences and financial impacts before you convert.
     

Resources

  • Consult a professional: You are strongly urged to consult with an accountant and/or tax advisor before making your final decision.
     
  • Learn more about the MNDCP Roth
     
  • Contact MSRS:  If you have questions regarding the MNDCP Roth, Roth conversion or to obtain an In-Plan Roth Conversion form.

 

MSRS retirement specialists are registered representatives of Voya Financial Partners, LLC (member SIPC).
This material is for informational purposes only and is not intended to provide investment, legal or tax recommendations or advice.