Bill Allowing Roth IRA for State Workers Clears Committee

Rep. Paradee: Bill would create ‘a tax-friendly way to save’ for retirement

DOVER – The state of Delaware was represented in Congress by the late William V. Roth Jr. for 34 years, but it does not offer its employees a retirement plan option that bears his name.

That is poised to change after the House Administration Committee signed off on legislation Wednesday that would add a Roth option to state-sponsored 403(b) and 457(b) savings plans that currently are offered to eligible teachers and state employees. House Bill 148 would not require the state to contribute any funds into those retirement plans, and plan participants could still choose to make traditional, non-Roth contributions.

Rep. Trey Paradee, D-West Dover, said the measure is a “simple, straightforward bill” that will not cost taxpayers or the state any money and is long overdue. The Roth option is named after the longtime former U.S. Sen. Roth, who was instrumental in developing the Roth IRA in 1997.

“The Roth option is an extremely tax-friendly way to save for retirement because it allows participants to enjoy tax-free growth on their investments while they are still employed and to make tax-free withdrawals during retirement,” said Rep. Paradee, who is a financial planner. “The fact that the state that sent Bill Roth to the U.S. Senate for 30 years doesn’t offer a Roth option for its workers is surprising. Many surrounding states, including Maryland, Pennsylvania and New Jersey, began adding the Roth option over two years ago when it was authorized by Congress. It would be only fitting that Delaware adds the Roth option for state workers and teachers.”

House Majority Leader Rep. Valerie Longhurst, who chairs the House Administration Committee, praised Rep. Paradee for his leadership in bringing the bill forward to provide state workers with a great opportunity to save for their retirement.

“One of the great things about the General Assembly is that each legislator brings their own personal, real-world experience to Dover,” said Rep. Longhurst, D-Bear. “Rep. Paradee saw an area that he works in every day and is trying to bring it to state workers so they have the same opportunity to save that private company workers and state employees in other states have.”

Under federal guidelines, participants will be able to contribute up to $17,500 into 403(b) or 457(b) plans or up to $23,000 if they are age 50 or older, regardless of household income for 2013. Roth 403(b) and 457(b) accounts are taxed differently than their traditional, non-Roth counterparts.

In a traditional, non-Roth account, contributions are considered tax-deferred and are deducted from a participant’s taxable income, which creates an initial tax savings. In addition, any growth that occurs in the account over time accrues on a tax-deferred basis. But when an individual retires and begins withdrawing funds from the account, the withdrawals are considered taxable income. 

By contrast, a Roth account allows participants to contribute after-tax income so it does not create an initial tax savings. However, all interest, dividends and capital gains that might be earned over time accrue on a tax-free basis, and when withdrawals are made during retirement, the distributions are tax-free. There also are additional estate-planning benefits to a Roth account that allow individuals to pass on their accounts to family and loved ones on a more tax-friendly basis.

The late Sen. Roth served as Delaware’s lone congressman for four years before winning a U.S. Senate seat in 1970, a seat he held for five six-year terms. Sen. Roth is widely known for the Kemp-Roth Tax Cut included in the 1981 Economic Recovery Tax Act, along with the 1997 Roth IRA. He passed away in December 2003.