Dodged a Bullet? “Rothification” Likely to Reduce Retirement Saving

IB#17-20

The brief’s key findings are:

  • As part of tax reform, Congress considered changes to 401(k)s that would require most new contributions to go to a Roth, rather than a traditional, account.
  • This budget gimmick would help pay for tax cuts because Roths are taxed up-front, rather than in retirement.
  • Such a change, however, could also affect how much people save.
    • Some could save more by keeping their contribution steady.
    • Some may save the same by reducing their contribution to maintain their take-home pay.
    • But many, especially those who have lower incomes or are cash-strapped, may overreact and save much less.
  • Rather than risk disrupting the retirement savings system, a better idea is to focus on actions to boost saving and expand access to workplace retirement plans.