David McKnight addresses a brand new proposal that could transform the way Americans use Roth IRAs and Roth 401(k) – and that could have serious implications for your retirement flexibility, liquidity, and long-term tax strategy.

With the current status quo, if a person has money in a 401(k) or even a Roth 401(k), they can usually roll it out into an IRA when they retire or leave their job.

However, money can't roll the other direction: you can't take a Roth IRA and move it into a Roth 401(k)...

A new bipartisan bill introduced by Republican Representative Darin LaHood and Democrat Representative Linda Sánchez aims to change that.

Under this proposal, you could roll your Roth IRA into an employer-sponsored Roth account like a Roth 401(k), a Roth 403(b) or even a Roth 457 plan.

This change could mean less paperwork, potentially lower fees, and a simpler investment picture.

David cites simplicity, cost and protection as a few of the reasons why lawmakers may want this bill to pass.

One of the incentives for Washington may have to do with the fact that encouraging people to use Roth accounts – which are taxed up front – can generate more short-term tax revenue for the government.

Everything isn't as good as it seems, though. David lists a few of the trade-offs involved with this potential change.

Firstly, loss of control. When your money is in a Roth IRA, you can invest it wherever you want: Index funds, EFTs, individual stocks, and more. With an employer plan, your investment menu would be limited by the options the plan administrator offers.

The so-called Five-Year Rule is another aspect worth considering.

Typically, every Roth account has to be open for at least five years or until 59 ½, whichever is later, before earnings can be withdrawn tax-free. 

Here's the tricky part: Each different kind of Roth account has its own five-year clock. This could turn into a logistical nightmare for plan administrators.

David shares some final considerations regarding who would benefit and who may get negatively affected by the proposed bill and points out that "Not all Roths are created equal."

 

 

Mentioned in this episode:

David's new book, available now for pre-order: The Secret Order of Millionaires

David's national bestselling book: The Guru Gap: How America's Financial Gurus Are Leading You Astray, and How to Get Back on Track

Tax-Free Income for Life: A Step-by-Step Plan for a Secure Retirement by David McKnight

DavidMcKnight.com

DavidMcKnightBooks.com

PowerOfZero.com (free video series)

@mcknightandco on Twitter 

@davidcmcknight on Instagram

David McKnight on YouTube

Get David's Tax-free Tool Kit at taxfreetoolkit.com

Darin LaHood

Linda Sánchez

Employment Retirement Income Security Act (ERISA)