Aug 7, 2023 / By Debra Taylor, CPA/PFS, JD, CDFA
The SECURE 2.0 Act contains some 92 new provisions to promote savings, boost incentives for businesses, and offer more flexibility to those saving for retirement. Here we discuss five main provisions related to Roth accounts and specific actions to be taking with clients so that they can benefit.
Most planners know that investments in Roth accounts can reap all kinds of benefits, including tax-deferred growth, tax-free withdrawals and no RMDs. However, many clients still remain unaware of Roth benefits or feel wary that Congress may eventually change the laws to punish Roth investors.
However, Congress is going in the exact opposite direction. And lately, Congress has doubled down on the future of the Roth. Indeed, SECURE Act 2.0 made a major step toward ‘Rothification’ through expanded use, new investing opportunities, and even a way to move money from college savings accounts to a Roth IRA.
Even further, SECURE Act 2.0 did not include any provisions that restrict or limit existing Roth strategies. To the contrary, Congress is continuing to march towards Roth IRAs, perhaps in an effort to accelerate tax revenue, in order to meet federal budget guidelines. Here is a list of some of the most important Roth provisions courtesy of SECURE Act 2.0, and a reminder of items to be discussed this year with your clients.
1. 529-to-Roth IRA rollovers
To help alleviate parents’ fears about over-funding 529 college savings accounts, SECURE Act 2.0 enables penalty-free rollovers from 529 college savings plans to Roth IRAs, with some limitations:
- The lifetime rollover limit is $35,000.
- The individual must be the designated beneficiary of the 529 plan and move funds to a Roth IRA in their name.
- The 529 account must have been opened for at least 15 years.
Even with these limitations, this is a nice opportunity to encourage Section 529 contributions, and it also protects account owners if the account proceeds can’t be used (or transferred to a sibling).
- Pro tip: Even without thinking about college, you can use this “back door” option to fund a Roth IRA if you are patient enough to wait 15 years. Having said that, this is a nice way for wealthy families to fund Roth IRAs for their children or grandchildren. When running the numbers, opening a Section 529 account today would require a contribution of about $15,000 this year to grow to $35,000 in fifteen years, assuming a growth rate of 7%.
2. Employer matching contributions can go directly to a Roth IRA
SECURE 2.0 improves Roth retirement options by allowing employer matching and non-elective contributions to be made directly to a Roth retirement plan. This provision is effective immediately. Previously, employer matching plans were limited to pre-tax accounts.
Such an amount will be included in the employee’s income in the year of contribution, and will not be subject to a vesting schedule. As with many of the SECURE Act 2.0, provisions, employers and custodians will probably need some time to update their systems and amend their plans.
- Pro tip: This is yet another way that your wealthier clients can benefit from growing their Roth accounts, now with their employer match. For clients who are interested in this provision, encourage them to discuss this opportunity with their employer right now to determine whether these contributions can be in the form of a Roth.
3. High earners required to use Roth for catch-up contributions
Employees are required beginning in 2024 to use the Roth option for catch-up contributions if they are high wage earners. The Roth restriction on catch-up contributions only applies to those who have wages in excess of $145,000 (adjusted for inflation) in the previous calendar year.
But it looks as if this change in rules doesn’t necessarily apply to all high earners. Because self-employed individuals do not technically receive “wages,” it would appear as if sole proprietors and partners could continue to make pre-tax catch-up contributions, even if their income from self-employment is higher than $145,000.
- Pro tip: SECURE Act 2.0 states that if the employer’s plan includes employees who earned over $145,000 in the previous year, but if the plan doesn’t include a Roth catch-up contribution option, then no one will be allowed to make catch-up contributions, regardless of the previous year wages. As a result of the restrictions here, all employers and employees should ensure that plan documents are updated to allow for this change. And for employees who are interested in getting their catch-up contributions in the form of a Roth, they should discuss with their employer now to confirm that the plan allows for this change.
4. Roth SIMPLE and SEP plans are now allowed
Before the SECURE 2.0 Act became law, employees weren’t able to make nondeductible Roth contributions to Savings Incentive Match Plans for Employees (SIMPLE) IRAs or Simplified Employee Pension (SEP) IRAs. A Roth SIMPLE (Savings Incentive Match Plan for Employees) IRA is a retirement savings plan available to small businesses with fewer than 100 employees.
But starting in 2023, SEP and SIMPLE IRAs can both be used for Roth contributions. This is a big change for business owners and employees that work for smaller businesses.
Although individuals technically have the ability to create Roth SIMPLE and separate accounts beginning January 1, 2023, as discussed above, it will likely take some time to amend plans and implement the procedures necessary to allow for these contributions.
- Pro tip: Be sure to discuss this Roth option with clients to ensure that they amend their plan to allow for these newer Roth options. And help assess the benefits to your client.
5. No RMDs for employer Roth accounts
Effective in 2024, RMDs will be eliminated from Roth 401(k), 403(b) and 457(b) plans. Beginning in 2024, Roth accounts in employer retirement plans will no longer require RMDs. In the past, employer plan Roth accounts were subject to regular RMD rules, making them subject to RMDs beginning at age 72.
This provision created a headache for those with employer Roth accounts, essentially guaranteeing the rollover to a Roth IRA so as to avoid the RMDs. Now, financial advisors will need to make a stronger case to encourage those rollovers out of employer plans, perhaps discussing tax planning and distribution guidance.
- Pro tip: It appears as if all RMD’s are eliminated from all employer Roth accounts, even if those RMDs have been taken in previous years. Thus, it appears as if you may be able to counsel your clients to stop RMDs from employer retirement accounts.
The SECURE 2.0 Act contains 92 new provisions to promote savings, boost incentives for businesses, and offer more flexibility to those saving for retirement. Because of its recent passage at the end of 2022, many practitioners may not have had time to digest the myriad provisions or determine a course of action. We discuss the above five main provisions related to Roth accounts and specific actions to be taking with clients so that they can benefit.
Debra Taylor, CPA/PFS, JD, CDFA, is the principal and founder of Taylor Financial Group, LLC, a wealth management firm in Franklin Lakes, N.J. Debra has won many industry honors and is the author of My Journey to $1 Million: The Systems and Processes to Get You There, a book about industry best practices. She is also a co-creator of the Savvy Tax Planning program.
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Securities offered through Parkland Securities, LLC, member FINRA/SIPC.