The Secure 2.0 Act eliminated the need to take annual required minimum distributions from Roth 401(k)s, 403(b) or governmental 457(b) plans during the participant's lifetime, so that the Roth 401(k) RMD obligations now mirror those that apply to Roth individual retirement accounts.
The provision in the 2022 retirement savings legislation has generated some controversy as it could reduce revenue for the federal government.
We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about the provision that eliminates the RMD obligation for Roth 401(k)s.
Below is a summary of the debate that ensued between the two professors.
Their Votes:
Their Reasons:
Bloink: Taxpayers who contribute to Roth accounts pay taxes up front. There's no real reason to require them to take RMDs, which is when taxpayers who fund traditional retirement accounts start paying taxes on their accumulated savings.Byrnes: We should be looking for ways to increase the federal government's revenue stream rather than reduce it. Elimination of any lifetime RMD requirements for Roth 401(k)s will undoubtedly have the opposite effect and further add to the national debt. With the elimination of lifetime RMDs for Roth 401(k)s, more taxpayers are likely to start funding those accounts because of the fact that contributions can continue to grow tax-free even after the account owner has reached their required beginning date.
Bloink: Eliminating RMDs for Roth 401(k)s also puts Roth 401(k)s on even footing with Roth IRAs, which were not subject to lifetime RMD rules pre-Secure 2.0. We shouldn’t want a complicated system where two fundamentally similar retirement plans are subject to vastly different distribution and tax requirements. Any impact on the federal government’s revenue stream will be minimal — because, after all, account owners have already paid taxes on the amounts they’ve contributed. Only the earnings are purely tax-free.
Byrnes: When we consider the fact that taxpayers have limited funds to allocate toward retirement savings, that's bound to encourage taxpayers to fund the Roth account over the traditional account — ultimately, reducing revenue for the federal government and making it much more difficult to get the 2017 tax cuts extended beyond 2025.
Bloink: We want to encourage taxpayers to develop a diverse set of accounts from which to draw once they eventually reach retirement, and this new rule makes Roth 401(k)s even more valuable for taxpayers. Remember currently, although something like 80% of employers offer Roth 401(k)s, very few employees actually choose to fund them over traditional accounts. Eliminating the lifetime RMD obligation creates an incentive to fund Roth 401(k)s because taxpayers can recognize the value of additional time for tax-free growth even after they’ve reached their required beginning dates.
Byrnes: Congress simply flipped the wrong way on this one. We really shouldn’t want a Roth 401(k) to be more attractive than a traditional 401(k). With a traditional 401(k), taxpayers gain the benefit of tax deferral, but both contributions and earnings are eventually taxed when the owner must begin taking RMDs. Now, with Roth accounts, earnings are never subject to taxation and can be permitted to grow tax-free even past the RBD. We have to expect that this added benefit is going to add to the tax costs of retirement plans — thus costing the government money that they could be using to extend the 2017 tax cuts.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.