Roth 457 Plan Pulled From Spending Bill

May 1, 2007

A proposal to create Roth 457 accounts was dropped from a House-Senate conference committee agreement that is to be sent to the President. The proposal, which creates savings plans similar to Roth 401(k)'s, is likely to be included in a subsequent spending bill sometime this year as it raises $1 billion for the Treasury and has no significant opposition.

The provision that would create Roth 457 plans was originally approved as part of an Emergency Supplemental bill in late March. 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 investments earnings are distributed tax free if held until retirement.

If enacted, the provision would become effective Jan. 1, 2008. We will continue to watch this provision as it makes its way through the legislative process and keep you posted.