Now that you've made after-tax contributions to your AT&T 401(k) retirement plan, it could be time to go a step further and create a potential tax-free income stream for your retirement.

By changing your after-tax balance to Roth this year, you might effectively avoid paying taxes on future profits.

What is a Roth in-plan conversion?

You may use this tool to convert your 401(k) plan's after-tax balance to Roth funds. Any investment earnings taxes linked with your after-tax contributions must be paid when you convert to Roth savings. If you fulfill all of the conditions, your Roth investments can grow tax-free and be taken tax-free in retirement.

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How does a Roth in-plan conversion work?

You choose how much (or how little) of your current after-tax account balance—both contributions and investment earnings—to convert to Roth. Any investment earnings (not your contributions) that are included in the amount you convert will be subject to taxation. Because income taxes aren't withheld at the time of conversion, you'll have to pay them out of pocket, either when you file your federal taxes for the year of conversion or when you make an anticipated tax payment to the IRS.

What impact could a Roth conversion have on your retirement savings?

The following example is for a worker with a $20,000 after-tax balance, $19,000 in contributions, and $1,000 in earnings. They can either a) convert their after-tax balance to Roth inside the plan or b) leave their after-tax balances alone.

 

Based on these growth projections, this employee must determine if they are willing to pay an extra $300 in taxes this year in exchange for a projected tax savings of $13,543 in retirement. Based on your existing after-tax amount and accompanying earnings, your potential savings will vary.

*Taxes on earnings are due in the year of conversion.

This hypothetical scenario is based on a 30% federal income tax bracket and a $20,000 after-tax balance, compounded tax-deferred at a 6% annual rate of return. Before the age of 65, no loans or withdrawals are made. It's possible that your individual experience will be different. This example is provided for educational purposes only and is not meant to give tax advice or reflect the performance of any security. When making an investment choice, keep in mind that the illustration may not reflect your expected investment horizon. This is not a guaranteed example. Investing with a possible return of 6% carries the risk of losing money. When earnings on after-tax contributions are withdrawn or converted, they are liable to taxes and may be subject to a 10% penalty.

 

If I’m interested, what should I do next? The easiest way to get started is to schedule a call with one of our AT&T-focused advisors or call the Fidelity Workplace Planning & Advice Center at 1-800-835-5098, to confirm your balances, discuss various options available to you, and process the conversion if you choose. The deadline to call to complete a conversion for the 2021 tax year is Thursday, December 23rd. You can also review the Roth conversion strategies guide.

 

*A distribution from a Roth 401(k) is not subject to federal taxes or early withdrawal penalties, provided the five-year aging requirement has been satisfied and one of the following conditions is met at the time of distribution: age 59½, disability, or death.

 

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, access.att.com, or by AT&T. We are an independent financial advisory group that focuses on transition planning and lump sum distribution. Neither The Retirement Group or FSC Securities provide tax or legal advice. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

The Retirement Group is a Registered Investment Advisor not affiliated with FSC Securities and may be reached at www.theretirementgroup.com.

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