Part of the deal that avoided the fiscal cliff allows eligible DC participants to more easily convert to a Roth IRA (free registration required). That put 401(k) plans front and center with the press, including the Washington Post, New York Times and Forbes.
As a result, participants will pay taxes now and thus generate more revenue for the government. With $5 trillion in DC plans, it’s a big opportunity. ASPPA’s Judy Miller, quoted in AdvisorOne, supported the move, commenting, “We felt it was always important to level the playing field between IRAs and 401(k)s. This is especially true when to comes to small businesses, who often would have to terminate the plan to get at that money.”
The Washington Post opined that it was a bad deal for the government because though the provision generates more revenue now and within the CBO’s 10-year calculation window, it will lose revenue from taxes that would have been due from withdrawals in traditional IRAs. That argument may help those looking to protect the tax incentives for DC plans, which seem costly when looked at through the CBO’s 10-year window but eventually provide revenue when people draw down their savings to provide retirement income.
Either way, advisors and providers alike should be looking at adding Roth provisions for their current clients and prospects. The opportunity will be attractive to many participants, especially decision makers with large account balances, younger workers with cash and those who believe tax rates will continue to go up. That’s a big group, by the way.
