Before you start making taxable contributions to the 401 (k) plan, make sure you make the most of your other tax-advantaged accounts, such as your IRA or Roth IRA. A clandestine Roth IRA is a practical loophole that allows you to enjoy the tax advantages of a Roth IRA. Once the conversion is complete, the money in your Roth IRA becomes subject to the Roth IRA distribution rules. If a person doesn't yet have a traditional IRA and has too much income to qualify for contributions to a Roth IRA, they could make non-deductible contributions to a traditional IRA by choice or due to restrictions on eligibility to deduct and then convert the assets into a Roth IRA.
In addition, a large clandestine Roth IRA can avoid the taxable event that usually results in a normal conversion to a clandestine Roth IRA. With a normal clandestine Roth IRA, you owe income taxes on the amount of money you converted into a Roth IRA, to the extent that your traditional IRA holdings were initially deductible. The financial institution that holds your traditional IRA contributions transfers them directly to the institution that holds your Roth IRA. The federal government says you can convert a traditional IRA to a Roth IRA regardless of your income.
However, they don't need to rule out Roth IRAs in their retirement income planning strategies, since they can use other methods to fund Roth IRA retirement plan renewals, IRA conversions and the clandestine Roth.