The Year of the Roth? How the Trump Administration could lean into the Roth 401(k)

The Trump administration and Republicans in Congress are working to extend key provisions of the Tax Cuts & Jobs Act of 2017 (TCJA), which are set to expire at the end of 2025.

But the tax cuts through the TCJA have a major price tag attached to them. Several organizations have estimated the cost of extending the TCJA at $4-5 trillion over the next decade. So, some Republicans in Congress are searching for potential offsets for the lost tax revenue.

What avenues are they exploring? Well, many are starting to look at retirement tax incentives as an opportunity to shore up those tax revenue losses. Outside of Social Security, Americans have over $40 trillion in total retirement savings with coverage levels reaching all-time highs (but still short of adequate labor market coverage). For this amount of retirement savings and access, 401(k) plans and IRAs cost over $200 billion in annual tax expenditures.

The retirement industry has been on the table many times for reforms. In 2017, Republicans briefly debated shifting or reducing the retirement tax advantages before the final TCJA bill emerged. With the TCJA expiration looming this year, discussions are re-emerging.

However, these debates are highly contentious. Advocacy groups like the Investment Company Institute (ICI) have argued against tapping into the retirement system to shore up tax revenue.

The road to Rothification?

There are two primary ideas the Trump administration and Republicans in Congress could consider for increasing tax revenue from the retirement system.

There is already some Roth movement well underway in the retirement system. For instance, the SECURE 2.0 Act of 2022 requires 401(k) catch-up contributions for higher income workers over 50 to go into Roth 401(k) accounts starting in 2026. Also, state auto-IRA programs generally use Roth IRAs for the (mostly lower-income) workers on those platforms and there is a generational divide opening up where younger workers are using Roth IRAs more than traditional IRAs (versus the opposite for Gen X and Boomers). And while we don’t talk about 529 college savings programs as Roth, that is the tax treatment they receive (i.e. taxed upfront on income and then tax-free on withdrawals for qualified educational expenses).

Our view is that reducing 401(k) contribution limits would be a policy mistake given the demographic changes underway in the US workforce and the funding challenges facing Social Security. But some Rothification of the system could help the US government generate more upfront tax revenue to help offset a potential TCJA extension. Note, however, that leaning the system more into Roth may not fundamentally change the budgetary picture; it could just move more tax revenue into the current decade for the Federal budget (versus further down the road).

What could this look like in practice?

There are a few different ways Congress could enact changes to encourage more Roth contributions. One approach would be to require employee contributions to go into both traditional and Roth 401(k) accounts starting in 2026. As an example, it could be 1:1 with every dollar an employee puts into a traditional account, they would also need to do the same for a Roth account. So if a worker wants to contribute $10,000 to their 401(k) in a year, they would need to split that with $5,000 in a traditional 401(k) account (as pre-tax $s) and $5,000 in Roth (as post-tax $s).

For many investors, having some mix of traditional and Roth tax treatment could serve as a hedge on future tax rates. Perhaps even more important for many savers, having some Roth 401(k) savings could make it easier to access funds for emergencies. With Roth accounts, the income taxes were already paid, so there would be no additional taxes or penalties for withdrawing employee contribution dollars.

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