Roth Contributions and the TCJA of ’17

In 2017 there was a tax cut that effected both individuals & corporations. Only one of those two groups however has the provisions of the tax act set to expire and those are the individuals. Without further Congressional approval, the tax cuts for individuals in the TCJA will expire in 2025.

So what does this mean for retirement savers? For the first 26 years of 401K’s, the only way to contribute to those plans was on a pre-tax basis. In 2006, the Roth 401K became available and over the course of the next decade many employers altered their 401K, 403B and 457B plans to allow for Roth contributions.

One of the most common misperceptions of employees is that if they put in money via a Roth contribution that any employer contribution via a match is also Roth. Employees must remember that all employer sources of matching or profit sharing will be pre-tax sources regardless of how they contribute to the plan.

Back to the TCJA though. For many savers, their taxes have gone down. The amount depends largely on how they were filing their taxes, if they live in a region with high SALT deductions, and other factors. What we do know however is that those lower rates will expire in 2025. For savers who have accumulated significant savings in pre-tax sources, now could be an ideal time to dump money into the Roth side of their plan thus increasing those assets and preparing for the unknown of what a post-2025 tax world looks like.