They distort federal budgeting, enable billionaires to accumulate wealth tax-free, and preclude making tax incentives fairer
One can make a strong case for getting rid of the Roth version of both 401s and IRAs. While having two forms of retirement saving is lovely for young professionals who know their tax rates will be higher in the future than today, this opportunity is swamped by the mischief they create.
The most egregious conversation over “Rothification” occurred in 2017, when Congress considered requiring that all employee contributions to 401s above $2,400 would go to a Roth. Although “Rothification” was not included in the 2017 legislation, it is alive and well today. The primary source of funding for the House’s bipartisan retirement bill is the conversion of all catch-up contributions to a Roth tax treatment.
In response, many academics have suggested changing the deduction to a credit. In fact, during the campaign the Biden team had a proposal to replace the current deductions with a credit that was estimated to be 26%–a revenue neutral change. With such a shift, both low and high earners would receive a tax credit of $260 for every $1,000 they contribute to a retirement plan.
However, the plan would not work in the current environment. As soon as the credit is introduced, any self-respecting high earner would shift contributions to a Roth 401. The result would be a loss to the Treasury as the high earners retain all their tax breaks and the lower paid get more. The only way to move from a deduction to a credit is to eliminate Roths. plans or clever lawyers will construct DB alternatives for high earners.
So, there you have it, three really good reasons to get rid of Roths. And now’s the time to do it. While the share of plans offering a Roth option has increased substantially, the percentage of participants offered an option that has accepted Roths has remained low . It’s an easy fix — simply require that all contributions going forward be made to traditional 401s and IRAs.
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