Is there a tax advantage to regularly converting pre-tax employer match 401k contributions to Roth 401k?

[teoman-david]

My employer gives me a match on 401k contributions. I'm fortunate, in that these are vested immediately. I understand that these are counted as tax-deferred, in that I'll pay tax on then when I withdraw, unless I do a Roth in-plan conversion. From what I understand, there is no limit to how often I can do this or how much I can convert.

What I'm wondering is: is there a tax advantage to calling Fidelity each time I get paid (or at least once a month / quarter) and having them convert the employer match contributions to Roth? Will this mean that I pay tax on the unconverted amount and earnings up to that point, but that any additional earnings for the year are tax-free? Or do they count the earnings for the whole year, meaning there is no tax advantage to my doing a single conversion for the entire year at once?

I haven't been able to get a clear answer on this. I'm relatively young, so a Roth conversion makes sense (and I'm budgeting for the tax impact of it). But I want to know what the best time is to do these conversions and I haven't gotten a clear answer.

Thanks!

[dmertz]

One invests money with the expectation that the investment will increase in value.  Given the assumption that the investments will increase in value (a reasonable but not always accurate assumption, at least over the short term), the sooner the In-plan Roth Rollover (IRR), the more the growth will be tax-free in the Roth account instead of tax-deferred in the traditional account.  The taxable amount of the IRR is the actual amount transferred from the traditional account to the Roth account.  IRRs are irrevocable, so there is no do-over if your investments happen to lose value after the IRR; the taxable amount is locked in at the time of the IRR.  Some people try to time the market, waiting for a dip in the market to do the IRR, but given the investing assumption that investments will generally increase in value, this is probably not a strategy that can be relied upon.  But if you do have money in the traditional account at the time when there is a dip in the value of your investments, it might be a tactical opportunity to do an IRR.

You won't want to have any taxes withheld from the IRRs (and probably are not permitted to anyway), so you may need to increase the withholding rate on your paycheck or make quarterly estimated tax payments to avoid a tax underpayment penalty for each tax quarter that you do an IRR.