An Analysis of the Roth 401(k)

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An Analysis of the Roth 401(k)

William G. Gale, J. Mark Iwry, Gordon McDonald

Published: January 09, 2006 || Availability: PDF | Printer-Friendly Version

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

Note: This report is available in its entirety in the Portable Document Format (PDF).

The text below is a portion of the complete document.

I. Introduction

The Roth 401(k), a new type of employee 401(k) contribution option, went into effect on January 1, 2006.¹ It bears essentially the same relation to the traditional 401(k) as the Roth individual retirement account bears to the traditional IRA. In both cases, the Roth vehicle does not allow tax deductions for contributions and does not tax the eventual withdrawal, whereas the traditional vehicle features tax-deductible contributions and taxable withdrawals.

This report describes the Roth 401(k) and discusses its potential effects. We find that the Roth 401(k) option will add complexity for employees and employers with little collateral social gain. The Roth 401(k) is unlikely to induce significant new private saving; almost all of the benefits are likely to accrue to high-income and wealthy taxpayers who are able to shift existing taxable assets into tax-favored savings plans. Moreover, the Roth 401(k) will increase the amount of resources that taxpayers can shelter and thus will likely have a negative effect on long-term federal budget revenue.

In short, the Roth 401(k) would complicate savings choices, induce little to no new private saving, and could actually reduce long-term national saving. Those are exactly the wrong directions for public policy.We discuss alternative policies in the conclusion.

Notes from this section

1 Section 617(a) of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA), Public Law 107-16, 115 Stat. 38, added section 402A to the Internal Revenue Code of 1986, as amended (the code). EGTRRA also provides for a Roth 403(b) for not-for-profit organizations, but does not provide for a Roth version of the section 457 deferred compensation plans offered to government employees.

Note: This report is available in its entirety in the Portable Document Format (PDF).