Shift to Roth 401(k)s 'highly likely' part of tax reform: former Treasury official Mark Iwry

Mandated contributions to Roth accounts would likely only be partial, as opposed to having a full repeal of pre-tax accounts

Oct 19, 2017 @ 4:21 pm

By Greg Iacurci

Optimism from past weeks regarding the fate of 401(k) tax benefits under tax reform is beginning to wane, with some signaling that employees would have to pay taxes upfront on at least a portion of their retirement savings.

Mark Iwry, a non-resident senior fellow at the Brookings Institution and a former senior Treasury Department official who served under President Barack Obama, is one who believes the Republican majority in Congress will mandate at least a certain portion of 401(k) contributions be diverted toward Roth accounts.

The rationale would be to shift retirement-plan contributions away from traditional pre-tax accounts as a partial way of raising revenue for desired cuts in individual and corporate tax rates.

"Yes, we will get tax cuts sooner or later, and the Rothification will be a likely part of it," Mr. Iwry, who served as deputy assistant secretary for retirement and health policy at the Treasury Department, said Thursday morning at the Defined Contribution Institutional Investment Association's annual Academic Forum in New York.

"My guess is: full Rothification, no, off the table, too extreme and too politically sub-optimal. Partial Rothification, yes, seems highly likely," he added.

"Full" Rothification would entail a mandated 100% use of Roth accounts for 401(k) savings, while "partial" would dictate only a certain portion of savings be Roth.

A shift to Roth accounts, which tax retirement savers upfront rather than upon withdrawal (as occurs with pre-tax accounts), would pull 401(k) tax revenue within the 10-year budget window the government uses to "score" federal tax revenues.

In a report earlier this year, the Joint Committee on Taxation estimated defined contribution plans would cost the government $583 billion in tax revenue between 2016 and 2020.

Some observers believe the policy would hurt low and middle income savers who value the upfront tax break on savings, and therefore may lead to less savings or fewer people to save.

Stephen Zeldes, a finance and economics professor at Columbia University's Graduate School of Business, citing research from the Investment Company Institute, said there's roughly $15 trillion in traditional, pre-tax savings in 401(k)s and IRAs, and less than $1 trillion held in Roth accounts.

"I wish the [Roth] discussion were focused on [retirement security]," Mr. Zeldes said. "Unfortunately, I think the main reason this is being talked about today is to get revenue into the budget window."

Officials in the administration of President Donald J. Trump are pushing to get tax legislation passed by the end of the year. However, many details of the tax package remain a mystery. The most recent tax outline released by Republican leadership didn't allude to any specific tinkering with 401(k)s, saying only that the framework "retains tax benefits that encourage work, higher education and retirement security."

While that language left some feeling rosy about the security of 401(k) tax benefits, it still leaves room for changes in the structure of 401(k) deferrals.

One commonly cited legislative proposal is that of former Representative David Camp (R-Mich.), who was chairman of the House Ways and Means Committee from 2011-15, which called for up to half of elective 401(k) deferrals to be pre-tax, with the remainder in Roth. (That equates to a $9,000 ceiling in 2017.)

Mr. Iwry believes Republicans would reduce that threshold to $3,000, which is the current median level of 401(k) contributions.

Congress could also seek to "reverse engineer" the threshold, by determining the threshold that would deliver a level of desired revenue, such as $500 billion, he said.

"My concern is that with Rothification, you could raise that kind of money, and that's the kind of money they may well be targeting," Mr. Iwry said.

0
Comments

What do you think?

View comments

Recommended for you

RIA Data Center

Use InvestmentNews' RIA Data Center to filter and find key information on over 1,400 fee-only registered investment advisory firms.

Rank RIAs by

Upcoming Event

Oct 23

Conference

Women Adviser Summit - San Francisco

The InvestmentNews Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video

INTV

The bizarro world of DOL and SEC rule supporters

Managing editor Christina Nelson talks with senior reporter Mark Schoeff Jr. about why groups that supported the Labor Department's fiduciary rule oppose much of the SEC advice package, and vice versa.

Latest news & opinion

10 most affordable U.S. cities for renters

Here are the U.S. cities that are most affordable for renters, according to Business Student.com, which compared the cost of rent to average salaries.

9 best - new - financial adviser jokes

Scroll through for nine new financial adviser laughs.

Fidelity CEO says zero-fee funds aimed at expanding its universe

Johnson says way to prosper in financial services is 'by building relationships.'

SEC advice rule contains a huge hole

Jay Clayton aims to clear up investor confusion by drawing a distinction between brokers and advisers in the agency's proposed package of revised standards. But where do dual registrants fit?

9 signs it's time to fire your client

Here are signals that a client should be asked to leave, according to experienced financial advisers.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print