Tax Tip Tuesday: SECURE 2.0 and ROTH Account

Tax Tip Tuesday

There are numerous changes resulting from the omnibus bill which is now a law and known as SECURE Act 2.0.  One of the most notable changes is the impact on Roth IRAs.  These changes include expanded use, new requirements, and even a way to move money from college savings accounts to a Roth IRA.

First, let’s get a firm understanding of what a Roth account is. Roth is a type of retirement account in which you fund it with dollars that have already been taxed.  That way, down the road when you pull money from your Roth account at retirement age, you will not be taxed on your contributions or the earnings.

The alternative to a Roth is to have a Traditional retirement account.  In this case, you fund it with dollars that have not been taxed so that when you do pull the money out, it will be taxable at that time.

Now let’s look at the top five Roth-related retirement changes that have occurred with the of Secure Act 2.0.

  1. No Required Minimum Distributions (RMDs) with Roth 401(k) plans. 

Effective 2024, individuals who leave assets in a Roth employer plan will no longer be subject to the mandatory RMDs during their life.

  • Penalty-Free 529 Plan Rollover to Roth IRA. 

This is the most significant change for SECURE 2.0 because it is an entirely new rule.  And of course, there are a lot of details and scenarios that have not been fully evaluated yet.

To promote more funding of 529 college savings plans, monies left in the plan now can be rolled over to a Roth IRA penalty-free and tax-free.  Of course, there are limitations so check with your tax professional or financial advisor for details.

  • Catch Up Contributions Required to be Roth

Another major change in SECURE 2.0 is the requirement that plan participants age 50+ make catch-up contributions to a Roth account.

Here’s the problem for individuals over age 50 who are usually entering their highest earning years.  They are no longer able to exclude $7,500+ from income which will end up costing most high earners in the form of higher taxes for the year.

  • SIMPLE and SEP IRAs can now Accept Roth Contributions

Before the passing of the Act, SIMPLE IRAs and SEP IRAs could only accept pre-tax funds. Now, for tax years starting in 2023 (e.g. now), both SEP and SIMPLE IRAs can offer Roth options.

  • Optional Treatment of Employer Contributions as Roth

Effective immediately, plan sponsors may choose to offer non-elective or employer matching contributions to Roth accounts. Employers offering matching based on student loan payment may also apply contributions to Roth accounts. 

All employer funds treated as Roth will be immediately 100% vested. But note that the employer’s Roth contribution will be included in the employee’s gross income for the year. This potentially creates a liquidity crunch if employer contributions are significant, as the employee doesn’t get any extra cash to pay the tax.

The caveat is that since these plans are offered through an employer, employees need to wait for the employer’s investment company to get the changes in place.  So before jumping on this option, know that a little patience will be needed until it is up and running as an option from your employer.

When determining which option is best for you, pre or post tax, maybe the best answer is both!  That’s because one view is that the reduced tax rates and brackets that became effective in 2018 with the Tax Cuts & Jobs Act will expire in 2025.  Without any changes, that means that in 2026 everyone’s tax brackets are going up.  So some think that it would be wise to pay taxes now at the lower rate.  Another view asks you to consider if your earnings at retirement time will be lower than they are now which would bode well for paying tax later.

The conclusion is this: SECURE Act 2.0 has some significant changes.  To better understand how the provisions can benefit you from a tax perspective, contact us at 301-714-2071 or visit www.SaundersTax.com.  We have been helping our clients enjoy a Less Taxing Life and More Prosperous Solutions since 1984. And we can help you, too!

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Richard Lee Kissel obituary 1944~2023

Mr. Kissel retired from US Department of Commerce, National Institutes of Science & Technology (NIST) after 31 years of service with the Federal Government.

Mabel V Mooney obituary 1926~2023

Mabel was a homemaker throughout her life. In her free time she enjoyed bowling (in younger years), watching game shows, and playing cards.