FEDweek

Ideas for “Rothification” Likely to Come up Again

There’s a new term gaining traction in the retirement/financial planning industry – “Rothification”. You won’t find that term in your Funk and Wagnall’s dictionary yet, but you may soon notice it coming into wider use.

In short, it means changing the rules on retirement contributions to limit or eliminate the ability to contribute pretax funds to a retirement account such as your TSP or an IRA – or even the compulsory conversion of some or all of a defined contribution plan to a Roth plan. (Roth retirement accounts include contributions from money that has already been taxed, and your gains come out tax free; not so for non-Roth accounts.)

One of the proposals for the recently passed Tax Cuts and Jobs Act (jokingly referred to in some circles as the Attorneys and Accountants Full Employment Act) was to reduce the amount of retirement savings that could be deferred from federal income tax from the current $18,500 to $2,400. This would make an additional $16,100 of income subject to federal income tax (as ordinary income) for the worker under age 50 who is able to fully fund a retirement plan up to the maximum.

Fortunately this proposal – which was one way lawmakers were considering “paying” for tax cuts – did not make it into the final version of the bill. Rothification is not dead, however, and some have predicted we will see similar proposals to Rothify retirement savings again in the future.

Doing so would give lawmakers access to additional tax revenues sooner, rather than having to wait for account holders take gains on their investments for them to be taxed.

Roth accounts can be a great tool for retirement savings but they’re not always the best solution. And the very fact that Rothification was being considered and is likely to come up again as a way to pay for legislative priorities should serve as a reminder that it pays to keep informed and participate in the decisions that impact your retirement to whatever extent you can.