Roth Accounts’ Rise Brings Opportunity, Uncertainty for Savers

As federal lawmakers focus on Roth contributions as a revenue raiser, what incentives and complexities do retirement savers face as they balance pre-tax and Roth dollars? Kendra Isaacson, a principal in Mindset, a bipartisan public policy consultancy based in Washington, D.C., and an adjunct professor at the Georgetown University Law Center and the Catholic University of America, Columbus School of Law, shared her thoughts with PLANADVISER. The following interview was edited for length and clarity.

PLANADVISER: How do you assess the likelihood that Congress may further mandate or incentivize Roth contributions as a revenue-generating measure, similar to the Roth catch-up provisions introduced in the SECURE 2.0 Act of 2022?

Kendra Isaacson

ISAACSON: The way Congress currently analyzes legislation, Roth is more attractive right now because it raises revenue, but only because you’re looking at a 10-year period.

Some people consider it a budget gimmick because, over the long term, if you’re looking at a life cycle of a saver, I don’t think you’re raising revenue on Roth.

At some point, the question is: Does Congress really step back and evaluate those rules of how they score things to adjust it more to reality, or are we stuck in this system that really pushes Roth, even if that is maybe not the best policy?

PLANADVISER: The Congressional Budget Office scoring system has always penalized 401(k) plans, right? If it is only looking at a 10-year period, much of the money looks like it’s never getting taxed. So if Congress sees Roth as more revenue-generating than 401(k)s because of the scoring system, how do you assess the likelihood that Congress may further mandate or incentivize Roth contributions as a revenue-generating measure, similar to the Roth catch-up provisions introduced in SECURE 2.0?

ISAACSON: I think there’s a history here that we should pay attention to, because I think there’s temptation there, right? Because everybody is very focused on “pay-fors,” given the deficit and given this like hyper-budget-focused Congress that we are currently in.

Tax expenditures for retirement are one of the biggest tax expenditures we have. So it makes it a target … [in that] perennial congressional search under the couch cushions for money. Healthcare, retirement—they’re your big targets where you can get a lot all at once.

In SECURE 2.0, there was a last-minute kerfuffle in the Senate Finance Committee about conservation easements—which randomly ended up in SECURE 2.0—but there was a need for a pay-for, and that is one of the ways that the Roth catch-up happened. It is not something that people set out to do, I think.

I think the hardship is on the recordkeeping side, and that has been quite a struggle. … People have a lot of stress from … the aftermath and the implementation of Roth catch-up contributions.

When people talk about Roth-ifying or even the idea of, “Oh my gosh, there’s going to be another reconciliation,” … the retirement industry gears up for a big fight. So I don’t think it’s as easy as, “We need money; we’re going to pay for it.” If it ever happens, it will happen like late at night … or maybe it’d be like a tiny tailoring to just raise a specific amount of money.

I don’t know that … our current budgetary system … using retirement makes the best policy. I’m hoping that we’re going to get to a place where, as we have a “silver tsunami,” Congress is going to start approaching retirement in a really thoughtful way, thinking about outside of that 10-year budget window, what do we need to do to prepare our workers and people for retirement in an adequate way?

You have to take a step even further back, not just looking at Roth, but also in Social Security, too. We have to look at the whole system, and that gets a little dicey and gets a lot more complicated.

PLANADVISER: You raise the issue of Social Security. We have the most recent report bringing insolvency even closer. Are you seeing policy discussions that are linking Social Security and Roth or other taxation of individual retirement savings?

ISAACSON: I think that there are certain camps that are having these discussions. … The most well-known is when [Senator] Ted Cruz suggested that Trump Accounts are the first step in privatizing Social Security. Yikes. … A thoughtful conversation around Social Security would not just kick it over to individual retirement savings. So I think we need both. I think we are going to have to have both. Congress loves an emergency and a crisis. I guess we’re a couple of years away from that.

I think it’s really important to have those bipartisan conversations, because for Social Security—unlike tax and retirement, which can be handled through reconciliation and only needs just a majority—you’re going to have to cross the aisle and have 60 votes to pass something in the Senate related to Social Security. This is where I hope that people will start talking about it in a holistic manner.

PLANADVISER: How should individuals and plan sponsors think about balancing tax diversification between pre-tax and Roth? How can we emphasize a system that allows for distributions from accounts as individuals want—instead of the default pro-rata?

ISAACSON: I think Roth is an important component of our retirement system. You know, ERISA stresses diversification. All of the personal finance gurus also stress diversification. I believe in diversification, not only in your investments, but also in your pre- and post-tax dollars. In my ideal world, you will have a mix of both Roth and traditional savings.

[Given] the number of Baby Boomers retiring and going through these financial shocks and the volatility of the market continu[ing], I do think that we are on the cusp of a wave of really focused policy on decumulation. That has been bubbling up and trending in the lifetime income discussions.

I think there will be [conversations about]: How do you spend your money? How do you take it out?

I just think the focus has been on accumulation for so long. There are lots of pieces of the decumulation puzzle that we don’t know yet.

People don’t like to think about their own mortality, and decumulation actually requires you to think about that, and it isn’t a very fun thing to do. In the accumulation phase … there’s so many tensions for your money. It feels like spending it should be the easy part, but it isn’t really. … It is equally difficult. So I’m glad that it’s in the conversation now.

PLANADVISER: The decumulation is also very personalized, which introduces complexity. Are there ways you think Roth comes up more in this post-retirement conversation?

ISAACSON: The United States has done a really good job to make some tweaks around things to reflect that highly personalized environment in SECURE 2.0. You know, there were very specialized early withdrawal penalty waivers for terminal illness.

With the focus on accumulation, we have all of these disparate savings vehicles where people are expected to figure out, “I need X dollars for my child’s college. I need X dollars for this and that.”

SECURE 2.0 allowing for people to transfer 529 to Roth was, I think, really great policy. I’m hopeful that we’re going to see more in that vein, where maybe Roth is the answer to help with some of the interchangeability between our various savings vehicles, which we have more now with Trump Accounts. We’re one generation away from everyone having an IRA, … [and] there’s so much cool stuff that we can do with that.

What does that look like? Are we still going to make people make these decisions 20, 30, 40 years before they know exactly how much they’re going to need? Or can we do some more work to allow for more changes at the back end?

I think about Roth in the future more along the lines of what we did in SECURE 2.0 and what kind of flexibility we can provide in the system. I don’t know that that’s the full answer, but it certainly helps move the needle a little bit.