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SECURE Act 2.0 - Roth Related Changes and Planning Opportunities

SECURE Act 2.0 - Roth Related Changes and Planning Opportunities

| January 18, 2023

The many changes in SECURE Act 2.0 related to Roth accounts, whether individual Roth IRAs or Roths within qualified employer plan accounts, can provide even more planning opportunities. Keep in mind, however, that Roths are one of several options that may be available as part of maximizing your employment compensation benefits or self-employment income. And equally important is developing a plan for optimizing future distributions in a tax-advantaged manner.


Two New Roth Options: : SIMPLE and SEP Roth IRAs

Previously, SIMPLE and SEP plans could only be funded with pre-tax funds. Once a SIMPLE or SEP Roth election is made, contributions will be included as part of the taxpayer’s income.

This change is welcomed and improves efficiencies, even with individuals previously having the option of converting pre-tax SEP IRA dollars to a Roth IRA immediately or at any time. For SIMPLE IRA owners, who could convert dollars to a Roth IRA after the SIMPLE had been funded for two years (with the first contributed dollars), directly funding a SIMPLE Roth IRA is certainly more efficient.

Employer Roth Contributions

Previously, only employees could make Roth deferrals within a plan. Now, employers can also deposit matching and/or nonelective contributions to an employee’s Roth plan accounts, as long as the contributions are nonforfeitable (not subject to a vesting schedule.) Remember, any such contributions are considered part of the employee’s taxable income for the year the contributions are made.


$145K+ Wage Earners to Use Roths for Plan Catch-Up Contributions if Available

This change pertains to catch-up contributions by individuals 50 years old or older made to 401(k), 403(b), and 457(b) plans that have Roth options. Employers are not required to provide Roth options,
so if there are none, then this provision does not apply. It also does not apply to catch-up IRA contributions, including SIMPLE IRAs.

In general, for those who have wages (an important distinction) of more than $145,000 in the previous calendar year from the current year employer sponsoring the current plan, any catch-up contributions must be designated as Roth contributions. This income threshold will be adjusted for inflation in the future.

We anticipate additional guidance will be issued prior to this provision becoming effective. As written, it appears that if an individual changed jobs during a previous calendar year, as long as the previous [partial] calendar year wages from the new/current year employer and plan sponsor did not exceed $145,000, this provision would not apply. Further, it appears self-employed individuals, such as sole proprietors and partners, would not be impacted. 

RMDs No Longer Required From Employer Plan Roths

Prior to the SECURE Act 2.0, there were different Required Minimum Distribution (RMD) rules for individually owned Roth IRAs than for Roths held within qualified employer plans. As of 2024, these RMD rules will align: no RMDs will be required from individual or plan Roths during an owner’s lifetime. Qualified employer plans include 401(k), 403(b), and 457(b) plans.

Already taking RMDs from your plan Roth under current rules? Come 2024, you can stop taking them.

Planning and tax matters are complex, with many restrictions and exceptions. This information is for illustrative purposes only. Your situation may differ. Please consult with your advisor.