Key Takeaways
- One financial planner has proposed a plan to help fix the deficit through retirement planning.
- Her proposal calls for Congress to require all retirement plans to offer a Roth option, as savers might be enticed to divert some of their wages to those accounts. This approach could increase tax revenue for the U.S. government, she said.
- Some economists and analysts are concerned that forgoing future tax revenue could impact the Treasury more later, and many employees aren’t currently enrolled in Roth options, despite being offered them.
As rising deficit levels cause Americans concern, one financial planner suggests that retirement savers could help lower them.
The federal government has spent $1.3 trillion more than it has collected in tax revenue so far this fiscal year. And President Donald Trump’s sweeping tax and spending bill is estimated to increase the deficit by $4.1 trillion over the next decade.
However, certified financial planner Nancy Hite said there is a way for retirement savers to reduce the deficit.
How Opting For A Roth Retirement Account Could Help The Deficit
Roth IRAs allow savers to pay taxes on their contributions, so all future withdrawals are tax-free. Some retirement plans also offer a Roth 401(k) option, a hybrid between a Roth IRA and traditional 401(k).
Hite said Congress should require all retirement plans to offer a Roth option. If they did, savers might be enticed to divert some of their wages to those accounts—providing more tax revenue for the U.S. government now. Hite says this would “dramatically help reduce the ongoing deficit.”
“If just 5% of people took some of their money and put it in a Roth account, it would be a tremendous windfall for the deficit, and it would be a tremendous windfall for [savers] in the future,” Hite said.
She said the savings option would likely be a more appealing solution to the deficit than Congress’s other revenue-driver—raising taxes to cover the costs of government programs.
“Unless the IRS becomes their favorite charity, most people have other places that they’d like to spend their savings,” Hite said.
Potential Concerns With This Approach
However, more than 90% of 401(k) plans currently offer Roth 401(k) options, but according to Merrill Lynch, only about 21% of employees use them. Because of the lack of engagement, economists and analysts aren’t so sure the plan would bring much change to the deficit.
“The change a new requirement would have on contribution behavior seems likely to be relatively small,” said Gopi Shah Goda, the director of the retirement security project at Brookings.
Hite said it’s the employer’s responsibility to educate employees on their options so they can make an informed decision about what type of retirement plan would best suit them.
While diverting employee contributions to Roth accounts would result in more tax revenue now, it would forgo future tax revenue.
“This is another example of kicking the can down the road,” said Chris Thornberg, founder of Beacon Economics.
Hite said employees would likely have pre- and post-tax accounts if given the option. That would mean the Treasury would receive tax revenue today on Roth accounts and in the future on 401(k) accounts, she said. This would benefit employees as well, because they would only have to pay taxes on retirement income from the traditional 401(k).
“By employers offering both a Roth and a traditional 401(k) account, they would provide people with the freedom of options. And Americans love options,” Hite said.