All 401(k)s to Become Roths?

Tax reform continues to be discussed behind-the-scenes in Washington. Media reports regularly indicate that one of the changes under discussion is to end upfront tax benefits for 401(k)s and other retirement plans. In effect, all retirement plans would become Roth plans. This article updates the situation and explains how that could affect retirement planning. THe issue is far from settled, so it might not happen. But it is one avenue policymakers are looking at.

Such a change could take the form of Rothifying 401(k) accounts — that is, forcing all 401(k) accounts to function the way only Roth 401(k)s and Roth IRAs do now. Contributions to regular 401(k) accounts would no longer escape being taxed as ordinary income.

In regular 401(k) accounts and IRAs now, workers get tax deductions on their contributions. Those contributions are not counted as part of their taxable income for the year. That’s why they are known as pretax contributions.

In contrast, contributions to Roth 401(k) accounts and to Roth IRAs are after-tax contributions. They are not excluded from your taxable income calculation.