Senate OK's Bill to Provide Roth 457 Plans to State, Local Government Workers

March 30, 2007

A provision that would create Roth 457 plans was approved as part of an Emergency Supplemental bill late yesterday. 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.

Senator Ron Wyden’s (D-OR) amendment on Rural and Community Schools passed as part of the Emergency Supplemental Appropriations bill. The Roth 457 provision was introduced as an offset for the cost of the rural schools provision. The Roth 457 amendment is estimated to raise $1 billion in tax revenue over 10 years.

The supplemental spending bill will face a House-Senate conference committee after Members return from a two-week Easter recess on April 16, 2007. We are optimistic that the provision will remain in the bill that eventually is signed into law by the President.

The provision would be effective 2008. We will continue to watch this provision as it makes its way through the legislative process and keep you posted.