Congress Says NO Rothification … for now

By Ed Slott, CPA
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When someone keeps telling you not to worry about them doing a certain thing, you know they are thinking about doing that very thing.

That’s what Congress is doing with so called “Rothification.”

As a review, “Rothification” – as it has become known –  is a way to raise revenue for the government by, in effect, taxing 401(k) contributions. Rothification would eliminate the tax deductions for 401(k) and other plan contributions and replace them with Roth 401(k)-type plans where there is no deduction, but the earnings will grow tax-free forever.

Rothification was seriously considered during the last year’s tax reform negotiations. Due to the uproar over losing deductions (a big tax increase for 401(k) contributors), the provision was dropped from the final bill, and it never got into the Tax Cuts and Jobs Act enacted last December.

But now, Congress is looking at round 2 of tax reform, and Rothification has come up again. However, according to an interview with Tax Analysts yesterday, Chairman Kevin Brady, (R-Texas), said that “the Ways and Means Committee has no plans to revisit the issue of so-called Rothification as part of any 2.0 proposals, and any rumors to the contrary are simply not correct.”

Personally, I like the idea of saving in a Roth for the long-term tax-free benefits in retirement, especially for younger workers who would fare better with Roth 401(k)s as opposed to 401(k)s.

But I suppose a switch of this magnitude was too much of a shock to the system for those counting on the tax deductions, even though all of these 401(k) accumulations, plus earnings, will be taxed later at what could be higher rates for many, leaving them less when they might need it more.

That being said, as a big Roth supporter, the number one worry among both financial advisors and consumers is that they don’t trust Congress. Big surprise! They like the idea of the Roth but they think Congress will double-cross them and change the rules to find some way to tax these Roth funds. I don’t think that will happen, because that would kill the Roth program. Roth 401(k)s and Roth IRAs are a cash cow for the government, and the fact that they keep bringing up ideas like Rothification to expand Roth-type retirement accounts shows that they want more Roths, not less. Since Roths have existed, Congress has been expanding access to them, because it brings in more revenue.

The biggest example was in 2010, when the $100,000 income eligibility limit for Roth conversions was eliminated, plus they gave everyone who converted an enticing 2-year deal to pay the taxes. That opened the floodgates and the cash came in – including mine! There were also the designated Roth accounts, Roth 401(k)s, which allowed increased contributions. In addition, many tax bills included enhanced Roth availability as revenue raisers.

Now Congress is talking again about not going with Rothification. That tells you they are still thinking about it, which tells me Congress wants more Roths and upfront tax money. Based on these signs, I believe the Roth IRA is here to stay, and you don’t have to worry about them killing the program by taxing it.


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