Promises by Congress to protect retirement-savings incentives don’t ease advocates

A recent promise by House Speaker Paul Ryan to protect incentives for retirement savings hasn’t completely set advocates at ease, as they worry about lawmakers coveting the potential revenue that could be generated by curbing such tax breaks.

In a June 20 speech, Mr. Ryan, R-Wis., said that as part of tax-reform, Republicans would “clear out special interest carve outs and excessive deductions, and focus on keeping those that make the most sense: home ownership, charitable giving and retirement savings.”

Mr. Ryan’s words helped calm waters that were roiled by the Trump administration’s garbled message about the fate of retirement-savings incentives. But lawmakers likely will continue to look for ways to raise revenue to finance other parts of tax reform, such as lowering individual rates. Tax deferrals for 401(k) and individual retirement account contributions are among the largest tax expenditures.

“We don’t know what ‘protected’ means,” said Jack Towarnicky, executive director of the Plan Sponsor Council of America. “It’s much better than where we were, but [Mr. Ryan] didn’t go into any detail. It’s pretty early in the process.”

Mr. Towarnicky traveled to Washington in late June as part of a lobbying campaign sponsored by the Save Our Savings Coalition. In meetings with lawmakers and their staffs, he cautioned against turning to “Rothification” as a so-called pay-for. In “Rothification,” traditional 401(k) plans would be converted to Roth 401(k) plans so participants would pay taxes on their contributions upfront rather than when they make withdrawals in retirement.

“It is not popular from a policy perspective,” Mr. Towarnicky said. “It is popular from a revenue-raising perspective.”

During his Capitol Hill meetings, he touted a recent PCSA survey of 443 employers that showed that fewer than 20% of employees who are eligible for Roth plans choose a Roth.

But during tax-reform negotiations, it’s never clear what evidence will be influential.

“There is some chatter that a Roth approach might be considered,” said Brigen Winters, a principal at Groom Law Group and a former Republican tax counsel on the House Ways and Means Committee.

But another former Hill aide doubts that lawmakers would want to fundamentally change retirement-savings rules.

“When you’re pressed for revenue you look for all the options,” said Dean Zerbe, national managing director of alliantgroup, a tax consulting firm, and a former Republican senior counsel on the Senate Finance Committee. But lawmakers “would be reluctant to be accused of discouraging savings. I could see members thinking hard before they got comfortable doing something like that.”

A financial planner agrees that it would be difficult for lawmakers to alter retirement-savings incentives.

“For most people, the [deferral] is more valuable than the tax-free income in the future,” said Tim Steffen, director of advanced planning at R.W. Baird & Co. “It would be a hard one to pass politically.”

A more likely “Rothification” would be to facilitate conversions from traditional IRAs to Roths, a policy that Congress has included in previous tax reform, according to Mr. Zerbe.

“It gives you a significant revenue boost within the 10-year budget window,” he said.

For now, the prospects for comprehensive tax reform are clouded, as Congress struggles to move a bill that would repeal the Affordable Care Act. Overhauling the tax code could take months and bump up against next year’s mid-term elections.

But pay-fors could be needed in a budget bill, a measure to raise the debt ceiling or other legislation, potentially putting retirement-savings incentives in play.

“Saying you’re going to preserve it doesn’t mean it won’t be affected at all,” Mr. Winters said.