The changes modeled by the SECURE 2.0 Act created enticing Roth planning opportunities for individuals across the board. The legislation touches on employer plans, required minimum distributions (RMDs), catch-up contributions, IRAs, and rollovers. A goal of the SECURE 2.0 Act is to continue to help individuals save and appropriately plan for retirement.
Employer-sponsored retirement plans such as 401(k)s, SIMPLEs, and SEPs can be key components in accumulating wealth for retirement. Beginning in 2025, companies with employer plans are required to automatically enroll employees into their plan unless the employee elects to opt out. A Roth-related change that the SECURE 2.0 Act added is that starting in 2023, employees can elect to have employer contributions made as Roth contributions. The Roth contribution would be 100% vested upon the employer’s contribution. A key consideration is that the employer’s contributions will be included in the employee’s gross income for that year, which could result in some individuals rising into a higher-than-expected tax bracket.
Another substantial change to employer-sponsored Roth retirement plans is that RMDs were eliminated for participants. This, however, does not apply to the beneficiaries. Previously, after age 72.5, people with traditional and Roth employer plans such as 401(k)s, 403(b)s, and many others were required to distribute a specific percent of their account each year. Now, for Roth employer retirement plans, the RMD is only applicable to the beneficiaries. Considering the success of beneficiaries is a major retirement and tax planning consideration and inherent with the new rules surrounding Roth-related plans.
Beginning in 2023, employer retirement plans’ catch-up contributions for people over age 50 are required to be Roth. Employees who made less than $145,000 (indexed for inflation) with the same employer the prior year are eligible for an exception to this rule. Employees between ages 60 and 63 are eligible to make additional catch-up contributions starting in 2024.
The higher catch-up contribution limits also apply to IRAs and Roth IRAs beginning in 2024. The catch-up contributions will be indexed for inflation.
SIMPLE and SEP IRAs also are eligible for Roth contributions. Previously, all contributions were made on a pre-tax basis. The SIMPLE and SEP IRA contributions that are made as Roth after-tax contributions are included in the employees’ income that year. Since SIMPLE and SEP IRAs are employer plans, they will be eligible for the additional higher Roth catch-up contributions indexed for inflation at ages 60 to 63.
A meaningful change the SECURE 2.0 Act has added is the ability to have a special emergency savings Roth account associated with an employer retirement plan. In 2024, non-highly compensated employees are able to contribute up to $2,500 per year (indexed for inflation) to this emergency savings Roth account. Employee contributions can potentially be matched by the employer depending on the plan rules. Since the account is for emergencies, the investment options are limited to preserve principal. This encourages individuals to save funds for an unexpected financial hardship. Fees, penalties, and charges would not occur on the first four withdrawals in a year.
Avoiding penalties, fees, and taxes when possible is important to most individuals. The SECURE 2.0 Act has authorized the use of funds not used in 529 college savings plans to be rolled into Roth IRAs if they are within the annual Roth contribution limits starting in 2024. The rollover is treated as a Roth IRA contribution in the year it occurs and has a lifetime limit of $35,000 currently. This is an important change that grants individuals flexibility in education and retirement planning.
There are key rules associated with the changes brought by the SECURE 2.0 Act and it is important to be aware of them. An increase in planning opportunities creates flexibility and encourages individuals to save accordingly for their future.
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