Convincing an employer to allow after-tax contributions and Roth rollovers in 401(k) plan

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Shift4
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Convincing an employer to allow after-tax contributions and Roth rollovers in 401(k) plan

Post by Shift4 »

My employer was recently acquired, and the purchaser is merging us into their 401(k) plan. The purchaser's plan disallows both after-tax contributions and any kind of Roth rollover feature. I have an opportunity to propose new 401K) plan features and would like to make the case for allowing both of these. The benefits of these features (e.g., https://www.bogleheads.org/wiki/Mega-backdoor_Roth) to employees are well documented. But for employers, it seems like after-tax contributions only make things more complicated, such as having to return contributions to HCEs due to ACP test failures from the disproportionate increase in HCEs' ACRs caused by their after-tax contributions. Roth rollovers seem less burdensome, so that should be an easier sell.

What are the benefits and costs to employers that allow after-tax contributions and Roth rollovers in their 401(k) plans, and why would an employer offer these features?
ThisTimeItsDifferent
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Re: Convincing an employer to allow after-tax contributions and Roth rollovers in 401(k) plan

Post by ThisTimeItsDifferent »

I would think the main benefit to employers is that it helps attract and retain valuable employees, like other benefits do. In particular, this benefit attracts employees who plan ahead.
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Re: Convincing an employer to allow after-tax contributions and Roth rollovers in 401(k) plan

Post by ronno2018 »

I like the idea of after tax built into the employer's plan but would the argument against be it is super easy for people to create a personal fidelity, vanguard, schwab, etc taxable account for after tax, and maybe they already have one?

Always shocks me how poorly invested people are -- "Among the nation's 123 million households, 17 million owned a brokerage account."
Rex66
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Re: Convincing an employer to allow after-tax contributions and Roth rollovers in 401(k) plan

Post by Rex66 »

It’s mostly a cost/headache for the employer. It’s just not enough of a benefit to attract non Boglehead employees.
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Re: Convincing an employer to allow after-tax contributions and Roth rollovers in 401(k) plan

Post by retiredjg »

I think the provisions for mega-backdoor Roth are probably a pain in the rear and an unnecessary cost for the employer. If so, the only way they are likely to take that on is if they wish to use it themselves.
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Re: Convincing an employer to allow after-tax contributions and Roth rollovers in 401(k) plan

Post by TropikThunder »

As much as the MBR is a bright shiny thing here on BH, I wonder how many people actually use it? Only a fraction of employers allow the feature in their plans, and only a fraction of employees at those companies know about it. Then, only a fraction of those employees take advantage of it because they don’t make enough to save over the elective deferral limit.

Plus, MBR’s can be a huge headache for companies. Many BH’s are familiar in passing with compliance testing for 401k’s and how plans can get in trouble for example if the only participants are Highly Compensated Employees, or if the majority of the contributions are from HCE’s. That is why people will occasionally post about how their company’s plan “failed” and they had to take back their contributions. The solution in many cases is to set up a safe-harbor plan with employer matching etc that avoids compliance testing.

The problem with the MBR is that there is no safe-harbor for after-tax contributions. If the company plan includes both non-HCE’s and HCE’s, and none of the non-HCE’s are participating in the after-tax part, then the HCE’s can’t participate either. Sure, you can make a plan that doesn’t have any non-HCE’s (physician groups for example) but that’s not reasonable in most cases. And the definition of a HCE is someone who makes over $130,000. How many people making less than that will know about their company’s after-tax plan and be able to afford to use it? Most companies will decide it’s just not worth the hassle to give a handful of employees an extra benefit that the majority of the company won’t be able to use.

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Last edited by TropikThunder on Wed Oct 20, 2021 6:15 pm, edited 1 time in total.
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Re: Convincing an employer to allow after-tax contributions and Roth rollovers in 401(k) plan

Post by Wiggums »

Having been through an acquisition, the acquiring company will be reluctant to make any changes if it will impact the conversion schedule. But that doesn’t mean you shouldn’t try.
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Re: Convincing an employer to allow after-tax contributions and Roth rollovers in 401(k) plan

Post by goodenyou »

Most employees don't take advantage of 401k plans. My wife's plan allows for after-tax spillover, Roth conversion and Roth IRA rollouts. I have to call Fidelity each time there is a conversion and have the same conversation with the Rep about how she (we) are one of the very few of several tens of thousands of employees in the MegaCorp that take advantage of this 401(k) feature. Also, I have to have the same conversation with the Rep about why most of the money is invested in bonds (TBM) in the pre-tax space. It is nice for them to pitch their investment services, but it gets tiring to discuss marginal tax rates and asset location in portfolio construction. Most people are clueless, and it will disserve them well.
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Re: Convincing an employer to allow after-tax contributions and Roth rollovers in 401(k) plan

Post by Dottie57 »

Rex66 wrote: Wed Oct 20, 2021 11:54 am It’s mostly a cost/headache for the employer. It’s just not enough of a benefit to attract non Boglehead employees.
+1

This feature’s use also skews to the highly paid and may cause problems when the plan is tested.
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Re: Convincing an employer to allow after-tax contributions and Roth rollovers in 401(k) plan

Post by Lee_WSP »

Rex66 wrote: Wed Oct 20, 2021 11:54 am It’s mostly a cost/headache for the employer. It’s just not enough of a benefit to attract non Boglehead employees.
This. The only benefit to the decision maker(s) is if it materially benefits him/her/them, ie if they themselves want it for themselves.
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Re: Convincing an employer to allow after-tax contributions and Roth rollovers in 401(k) plan

Post by goodenyou »

Your convincing will likely be wasted breath as this will be a target to disallow with little resistance. That's for a future discussion very soon and forbidden here for now.
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Re: Convincing an employer to allow after-tax contributions and Roth rollovers in 401(k) plan

Post by Grt2bOutdoors »

Dottie57 wrote: Wed Oct 20, 2021 1:58 pm
Rex66 wrote: Wed Oct 20, 2021 11:54 am It’s mostly a cost/headache for the employer. It’s just not enough of a benefit to attract non Boglehead employees.
+1

This feature’s use also skews to the highly paid and may cause problems when the plan is tested.
My former employer capped it at a relatively low dollar figure. I believe that was due to HCE issues and that while we had a safe harbor plan, most HCE’s either did not know of this option or did not understand the tax advantages in funding it. I recall a conversation with a senior manager about how well designed the 401k was and they looked at me like a deer in the headlights when I spoke of the ability to make after-tax contributions to it. And this was at a large global financial institution.
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Re: Convincing an employer to allow after-tax contributions and Roth rollovers in 401(k) plan

Post by Rex66 »

Right
Most of the time people care about the match rate
Some care about the costs of investing within the plan
A few Bogleheads really want this

It’s hard to attract people with an option they don’t understand. When management wants to retain or hire and use return plans as part of this it’s match and/or defined benefit.
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Re: Convincing an employer to allow after-tax contributions and Roth rollovers in 401(k) plan

Post by exodusNH »

Rex66 wrote: Wed Oct 20, 2021 2:35 pm Right
Most of the time people care about the match rate
Some care about the costs of investing within the plan
A few Bogleheads really want this

It’s hard to attract people with an option they don’t understand. When management wants to retain or hire and use return plans as part of this it’s match and/or defined benefit.
We have a Safe Harbor match and still don't have 100% participation, even just to get the 4% by contributing 5% of your salary.

I'd like a MBR option, but the plan would never past compliance testing.
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Re: Convincing an employer to allow after-tax contributions and Roth rollovers in 401(k) plan

Post by Spring garden »

When is your opportunity to propose changes? I suspect your employer would not consider the suggestion and costs of implementation until legislative clarity. Personally I would not spend effort advocating for this until we can discuss the currently forbidden subject on the forum.
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Re: Convincing an employer to allow after-tax contributions and Roth rollovers in 401(k) plan

Post by Shift4 »

Thanks to everyone for the great timely feedback on this. Think I'll position it as an under-the-radar benefit for savvy folks, perhaps as something to throw in if they are already making other changes to the plan.
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Re: Convincing an employer to allow after-tax contributions and Roth rollovers in 401(k) plan

Post by Shift4 »

Spring garden wrote: Wed Oct 20, 2021 8:01 pm When is your opportunity to propose changes? I suspect your employer would not consider the suggestion and costs of implementation until legislative clarity. Personally I would not spend effort advocating for this until we can discuss the currently forbidden subject on the forum.
Good question--plan disclosures for 2022 are due to participants by November 1, and the administrator would have to file paperwork with the recordkeeper before that with enough time to process it...yeah, this isn't happening by then. Maybe I plant the seed for 2023 if it's still a thing by then.
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Re: Convincing an employer to allow after-tax contributions and Roth rollovers in 401(k) plan

Post by Shift4 »

TropikThunder wrote: Wed Oct 20, 2021 12:30 pm As much as the MBR is a bright shiny thing here on BH, I wonder how many people actually use it? Only a fraction of employers allow the feature in their plans, and only a fraction of employees at those companies know about it. Then, only a fraction of those employees take advantage of it because they don’t make enough to save over the elective deferral limit.

Plus, MBR’s can be a huge headache for companies. Many BH’s are familiar in passing with compliance testing for 401k’s and how plans can get in trouble for example if the only participants are Highly Compensated Employees, or if the majority of the contributions are from HCE’s. That is why people will occasionally post about how their company’s plan “failed” and they had to take back their contributions. The solution in many cases is to set up a safe-harbor plan with employer matching etc that avoids compliance testing.

The problem with the MBR is that there is no safe-harbor for after-tax contributions. If the company plan includes both non-HCE’s and HCE’s, and none of the non-HCE’s are participating in the after-tax part, then the HCE’s can’t participate either. Sure, you can make a plan that doesn’t have any non-HCE’s (physician groups for example) but that’s not reasonable in most cases. And the definition of a HCE is someone who makes over $130,000. How many people making less than that will know about their company’s after-tax plan and be able to afford to use it? Most companies will decide it’s just not worth the hassle to give a handful of employees an extra benefit that the majority of the company won’t be able to use.

https://www.asppa-net.org/news/browse-t ... rely-works
Despite how it totally crushes every aspect of my current MBR quest, I just love this post. Oh well. :beer
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Re: Convincing an employer to allow after-tax contributions and Roth rollovers in 401(k) plan

Post by Lou354 »

My company’s 401k plan offers traditional and/or Roth contributions. Some years back the plan considered in-plan conversions from traditional to Roth. We decided not to add that feature because we found that almost no one would utilize it. (After-tax contributions and Mega backdoor Roth were not under consideration.)
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Re: Convincing an employer to allow after-tax contributions and Roth rollovers in 401(k) plan

Post by MrJedi »

I work in mega Corp with MBR compatible plan. Honestly I just learned about it 2 years ago and I've been working here for nearly 7 years.

I've talked about it with dozens of coworkers and not a single one of them had any clue what I was talking about. Even inside the personal finance group forum within the company there are only a few people who seem familiar with it there out of hundreds I see in the group. I would not be surprised if actual utilization of this MBR feature is <1% at my company.
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Re: Convincing an employer to allow after-tax contributions and Roth rollovers in 401(k) plan

Post by tenkuky »

I see many posts re. MBR to OPs question, but none about employer feasibility for just in-service rollovers for Roth 401K to Roth IRA.
Has anyone successfully got this implemented and what is the employer burden?
Asking as that is a low hanging fruit I might advocate for at my place.
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Re: Convincing an employer to allow after-tax contributions and Roth rollovers in 401(k) plan

Post by Soon2BXProgrammer »

tenkuky wrote: Wed Oct 20, 2021 10:06 pm I see many posts re. MBR to OPs question, but none about employer feasibility for just in-service rollovers for Roth 401K to Roth IRA.
Has anyone successfully got this implemented and what is the employer burden?
Asking as that is a low hanging fruit I might advocate for at my place.
All the plans that I have personally seen that allow "in-service pre retirement age distributions/rollovers" are only for "aftertax" funds and not "pretax/Roth" funds.
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Re: Convincing an employer to allow after-tax contributions and Roth rollovers in 401(k) plan

Post by CletusCaddy »

Lou354 wrote: Wed Oct 20, 2021 9:37 pm My company’s 401k plan offers traditional and/or Roth contributions. Some years back the plan considered in-plan conversions from traditional to Roth. We decided not to add that feature because we found that almost no one would utilize it. (After-tax contributions and Mega backdoor Roth were not under consideration.)
Of course no one would utilize it; without the after-tax contributions, in-plan Roth conversion is worthless
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Re: Convincing an employer to allow after-tax contributions and Roth rollovers in 401(k) plan

Post by MrJedi »

tenkuky wrote: Wed Oct 20, 2021 10:06 pm I see many posts re. MBR to OPs question, but none about employer feasibility for just in-service rollovers for Roth 401K to Roth IRA.
Has anyone successfully got this implemented and what is the employer burden?
Asking as that is a low hanging fruit I might advocate for at my place.
The pretax and Roth elective deferrals (the amounts applied to the 19.5k limit) are non distributable while active in the plan. This is IRS rule. There are exceptions like hardship withdrawal, but otherwise not allowed.
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Re: Convincing an employer to allow after-tax contributions and Roth rollovers in 401(k) plan

Post by Shift4 »

Soon2BXProgrammer wrote: Wed Oct 20, 2021 10:50 pm
tenkuky wrote: Wed Oct 20, 2021 10:06 pm I see many posts re. MBR to OPs question, but none about employer feasibility for just in-service rollovers for Roth 401K to Roth IRA.
Has anyone successfully got this implemented and what is the employer burden?
Asking as that is a low hanging fruit I might advocate for at my place.
All the plans that I have personally seen that allow "in-service pre retirement age distributions/rollovers" are only for "aftertax" funds and not "pretax/Roth" funds.
CletusCaddy wrote: Wed Oct 20, 2021 11:42 pm
Of course no one would utilize it; without the after-tax contributions, in-plan Roth conversion is worthless
Our legacy plan evolved over time. At first Roth deferrals weren't allowed. Later on when we amended the plan to allow Roth deferrals, we also allowed direct in-plan Roth rollovers (although non-Roth after-tax contributions were still disallowed :oops: ), and we had some of the lower paid folks utilize this for all of the non-Roth contributions made up to that point.

As for the employer's burden, administering the Roth rollovers required minimal effort: pulling the right form from the plan site for employees, reviewing it after employees' completed it, and signing/delivering to the recordkeeper. I think the hardest part was scanning in the wet-signed form, as the recordkeeper wouldn't allow e-signatures.
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Re: Convincing an employer to allow after-tax contributions and Roth rollovers in 401(k) plan

Post by invest4 »

TropikThunder wrote: Wed Oct 20, 2021 12:30 pm As much as the MBR is a bright shiny thing here on BH, I wonder how many people actually use it? Only a fraction of employers allow the feature in their plans, and only a fraction of employees at those companies know about it. Then, only a fraction of those employees take advantage of it because they don’t make enough to save over the elective deferral limit.

Plus, MBR’s can be a huge headache for companies. Many BH’s are familiar in passing with compliance testing for 401k’s and how plans can get in trouble for example if the only participants are Highly Compensated Employees, or if the majority of the contributions are from HCE’s. That is why people will occasionally post about how their company’s plan “failed” and they had to take back their contributions. The solution in many cases is to set up a safe-harbor plan with employer matching etc that avoids compliance testing.

The problem with the MBR is that there is no safe-harbor for after-tax contributions. If the company plan includes both non-HCE’s and HCE’s, and none of the non-HCE’s are participating in the after-tax part, then the HCE’s can’t participate either. Sure, you can make a plan that doesn’t have any non-HCE’s (physician groups for example) but that’s not reasonable in most cases. And the definition of a HCE is someone who makes over $130,000. How many people making less than that will know about their company’s after-tax plan and be able to afford to use it? Most companies will decide it’s just not worth the hassle to give a handful of employees an extra benefit that the majority of the company won’t be able to use.

https://www.asppa-net.org/news/browse-t ... rely-works
Truth. Even if you did know about it, it may take quite some time to really utilize it when you consider all the other tax-advantaged spaces you may wish to prioritize first (401k pre-tax, Roth, HSA, etc.).

MrJedi wrote: Wed Oct 20, 2021 9:45 pm I work in mega Corp with MBR compatible plan. Honestly I just learned about it 2 years ago and I've been working here for nearly 7 years.

I've talked about it with dozens of coworkers and not a single one of them had any clue what I was talking about. Even inside the personal finance group forum within the company there are only a few people who seem familiar with it there out of hundreds I see in the group. I would not be surprised if actual utilization of this MBR feature is <1% at my company.
I had no clue until I saw MBR mentioned on this forum (which I only joined in 2019) and went for a look in my plan (bingo!). Of course, I am super grateful for the opportunity and jumped all over it right away as I am further in my career / income and in a position to take advantage.
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Re: Convincing an employer to allow after-tax contributions and Roth rollovers in 401(k) plan

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Re: Convincing an employer to allow after-tax contributions and Roth rollovers in 401(k) plan

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MrJedi wrote: Wed Oct 20, 2021 9:45 pm I work in mega Corp with MBR compatible plan. Honestly I just learned about it 2 years ago and I've been working here for nearly 7 years.
I wonder if we work for the same mega corp. If so, you can rest easy, because after-tax contributions and roth conversions have only been available in the employer plan for 2 years. So you may not have missed any years of eligibility during which the feature was actually available in the plan.
MrJedi wrote: Wed Oct 20, 2021 9:45 pm I've talked about it with dozens of coworkers and not a single one of them had any clue what I was talking about. Even inside the personal finance group forum within the company there are only a few people who seem familiar with it there out of hundreds I see in the group. I would not be surprised if actual utilization of this MBR feature is <1% at my company.
Mostly the feature will be taken advantage of by either (a) very very highly compensated employees (executive level), or (b) more regular "paycheck" employees that are old enough to have their mortgage paid off, kids through college already, not too many years off from retiring themselves, and wanting to pad their retirement savings during their last handful of years of full-time employment (possibly making up for lost time with a few years at the end). I'm a category "b" guy.

I went to an on-site class about the after-tax and roth conversion features shortly before these first became available in our plan. The teacher was a representative from the 401K plan provider (Fidelity). On a work site with a few thousand employees, there were three students in the room.
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Re: Convincing an employer to allow after-tax contributions and Roth rollovers in 401(k) plan

Post by goodenyou »

Mostly the feature will be taken advantage of by either (a) very very highly compensated employees (executive level), or (b) more regular "paycheck" employees that are old enough to have their mortgage paid off, kids through college already, not too many years off from retiring themselves, and wanting to pad their retirement savings during their last handful of years of full-time employment (possibly making up for lost time with a few years at the end).
There is another category. A couple living off one paycheck and having a spouse with an employer based plan that allows a Mega Backdoor Roth.
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Re: Convincing an employer to allow after-tax contributions and Roth rollovers in 401(k) plan

Post by TomatoTomahto »

Rex66 wrote: Wed Oct 20, 2021 11:54 am It’s mostly a cost/headache for the employer. It’s just not enough of a benefit to attract non Boglehead employees.
I remember 30 years ago failing to convince coworkers to contribute to a 401k that matched $2 for each $1 of contribution! These were “smart” college educated people working in software development for financial services. It was shocking.

Things have improved in the general population about retirement savings (as workers have smelled the pensions “going away” coffee). Still, MBR is a heavy lift, and financially illiterate employees in the old company might regard it as an unfortunate change in the 401k. Why? Because facts no longer matter and a surprising proportion of tax payers don’t understand how marginal rates work, much less how a Roth can be beneficial. All they will see is that their take home pay is lower.
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Re: Convincing an employer to allow after-tax contributions and Roth rollovers in 401(k) plan

Post by exodusNH »

TomatoTomahto wrote: Fri Oct 22, 2021 7:48 am
Rex66 wrote: Wed Oct 20, 2021 11:54 am It’s mostly a cost/headache for the employer. It’s just not enough of a benefit to attract non Boglehead employees.
I remember 30 years ago failing to convince coworkers to contribute to a 401k that matched $2 for each $1 of contribution! These were “smart” college educated people working in software development for financial services. It was shocking.

Things have improved in the general population about retirement savings (as workers have smelled the pensions “going away” coffee). Still, MBR is a heavy lift, and financially illiterate employees in the old company might regard it as an unfortunate change in the 401k. Why? Because facts no longer matter and a surprising proportion of tax payers don’t understand how marginal rates work, much less how a Roth can be beneficial. All they will see is that their take home pay is lower.
An ex worked for Putnam, in the call center. She told me that while she worked there, she was always getting angry calls from people wondering why this "401-OK" was "stealing my money."
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