‘Rothification’ to pay for tax cuts seen as losing momentum, for now

Tax incentives to encourage retirement savings appear to be safe for now, but proponents of traditional savings plans are remaining vigilant, as Republicans on Wednesday released the outline that will guide tax reform.

The Republican framework “retains tax benefits that encourage work, higher education and retirement security. The [congressional tax-writing] committees are encouraged to simplify these benefits to improve their efficiency and effectiveness.”

(More: Read the GOP proposal.)

That language leaves a lot of room for changes to retirement-savings tax-deferrals, which allow workers to put money into 401(k) plans tax-free and pay taxes in retirement when they withdraw it. One of the ideas that has been floating around Capitol Hill to pay for reducing individual taxes across the board is to require Roth 401(k) plans that tax money as it is put into a retirement account and then allows tax-free withdrawals in retirement. Such a change is referred to as “Rothification.”

“Some of the momentum that seemed to be developing a few months ago at the moment seems to have chilled,” Rep. Richard Neal, D-Mass. and ranking member of the House Ways and Means Committee, said Wednesday at a Financial Services Roundtable event in Washington. “The danger here is that some enterprising [congressional] staffer looks for revenue. The temptation lurks.”

(More: Promises by Congress to protect retirement-savings incentives don’t ease advocates.)

Robert Reynolds, chief executive of Great-West Financial and Putnam Investments, has received the same signals.

“We’re hearing that [Rothification] is not on the table, but I would highly emphasize what you heard here today — right now,” Mr. Reynolds said in an interview on the sidelines of the FSR event. “Until we see the final bill, we have to be really telling the story of the impact Roth could have on the system.”

BIG INCENTIVES

Congress could look to retirement-savings deferrals as a source of cash to pay for other parts of tax reform because the incentives topped $158 billion in 2015, according to the Tax Policy Center.

“American peoples’ savings are not some honey pot for Congress to tap to pay for tax cuts,” Mr. Reynolds said in a speech at FSR. “The savings of the American people and the incentives that encourage them should be expanded in tax reform we undertake. Savings equals growth.”

In his new book, From Here to Security, Mr. Reynolds stresses that increasing workplace retirement-savings programs is a key to ensuring that more Americans build a nest egg. He said that Congress shouldn’t meddle with traditional 401(k)s.

“The pre-tax is so critical for younger, medium to lower income workers, even to toy with that would be a huge mistake,” Mr. Reynolds said.

DEMOCRATS RESIST

Just as Senate Democrats have done in previous weeks, Mr. Neal said that he is opposed to Rothification.

“That would offer a disincentive for people to set those dollars aside,” Mr. Neal said. In an interview, he said he anticipated that all Democrats “would stand against it.”

(More: Opponents of shifting to Roth plans speak up in Senate.)

Chad Brown, vice president and managing director of wholesale distribution at Transamerica Capital Inc., also cautioned against ending traditional 401(k) plans.

“Rothification could potentially eliminate incentives for small businesses to offer retirement arrangements,” Mr. Brown said in an interview on the sidelines of the FSR event.

Over the next few months, congressional committees will work to develop the framework into legislation. The framework calls for reducing the current seven tax brackets to three (12%, 25% and 35%), doubling the standard deduction, lowering taxes on pass-through businesses to 25% and reducing the corporate tax rate to 20%, among other steps.

Given the failure of Republicans to pass a health-care bill this year, Mr. Neal has doubts the party will succeed on tax reform. The chance “at best is still 50-50.”

Related Topics: Putnam Investments, Transamerica Funds