Senate Finance Committee Pushes Forward with Roth 457 Provision

March 08, 2010

The Senate Finance Committee, this week, passed the Tax Extenders Act of 2009, which includes a provision to establish a Roth feature for state and local 457 plans.

The outlook on the provision, however, is not clear at this point. The House version of the tax extenders bill passed last December without inclusion of the Roth 457 provision. The two chambers will go to conference to resolve the discrepancy and any other differences between the two versions. Historically, the House has declined to expand access to Roth options.

The provision would level the playing field for state and local government workers by permitting 457(b) plans to offer the designated Roth accounts already permitted in 401(k) and 403(b) plans. Under current law, 401(k) plans and 403(b) plans may allow workers to designate contributions as Roth contributions.

As with a Roth IRA, designated Roth contributions to 401(k) and 403(b) plans are taxed as income in the year of the contribution, but investment earnings are distributed tax free if held until retirement. Roth 457 arrangements would fall under the total contribution caps for 457 plans, which is $16,500 in 2010.

The prospects for enactment of the Roth 457 provision in this or another bill is enhanced by its raising revenue for the Federal Treasury. The Roth 457 proposal would raise an estimated $1 billion in taxes over 10 years.