Debate: Will the ‘Rothification’ of Catch-Up Contributions Benefit Taxpayers?

Byrnes: Many employers don’t offer a Roth option because the issue is just too complex for employers to be responsible for managing. For most employees, a pre-tax contribution is the most beneficial option — and many plan participants are not even able to max out their pre-tax contributions. By removing the added benefit of being able to reduce taxable income by a more sizeable amount, this “rothification” of catch-up contributions may actually discourage taxpayers from taking advantage of the increased limits.

Bloink: This new law will have a twofold benefit; first, it will offer the current revenue needed to offset some of the other important provisions contained in the law. Second, it requires employers to offer a Roth option in order to allow their employees to access the enhanced catch-up benefit once they reach their 60s. That will greatly expand the ability of employees to contribute to a Roth, something we should all be happy about.

Byrnes: This makes offering a retirement plan even more complicated and burdensome for smaller businesses that may be reluctant to add to their administrative burden. Further, it limits employee choice. Employees have the option of establishing a Roth IRA outside of the work-sponsored plan. They should also be able to choose where their catch-up contributions land. This provision is designed solely to raise additional revenue but will backfire in terms of the added complexities.

Bloink: Catch-up contributions to retirement accounts are offered to allow taxpayers who were unable to contribute the full amounts to their accounts to “catch up” on retirement savings. By definition, these taxpayers have reached a point in life where they are wealthy enough that they are able to max out their pre-tax contributions to traditional retirement accounts. It makes complete sense that any additional contributions that are allowed be made with after-tax dollars.

Byrnes: If we’re primarily concerned with encouraging taxpayers to maximize their retirement savings, we should be giving taxpayers the choice of whether to treat catch-up contributions as traditional or Roth contributions. By taking away that choice, we may actually be discouraging Americans from taking advantage of an important savings benefit.

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