Washington, D.C. partner and former Assistant Secretary of Labor Brad Campbell appeared on Fox Business’ “Countdown to the Closing Bell with Liz Claman” on September 15 to discuss possible changes to the 401(k) tax rules.
Under the current tax laws, money contributed to a 401(k) retirement plan or IRA is “pre tax”—it is excluded from income tax in the current year, and taxes are deferred until the money is distributed at retirement. However, as Brad explains, Congress is considering making mandatory so-called “Roth” contributions—in which contributions are taxed in the current year and not taxed at retirement—in order to raise hundreds of billions in revenue for other tax cuts. Roth features in plans and IRAs are currently elective, not mandatory, and most taxpayers make pre-tax contributions.
Brad expressed concern about the effect of mandatory “Rothification” on retirement savings rates, stating that, “It’s a very big problem because one of the big incentives that we have…is the fact that you get to defer the taxation on this money until you retire, and getting that tax benefit is a big reason a lot of people try to contribute the maximum to their 401(k).”
However, Brad also noted that the plan is not official: “There has not been a clear plan released by either side yet…there’s been a lot of talk but not a lot of clarity.”