How the Secure 2.0 Act can affect your Roth contributions

The SECURE ACT 2.0 and the ROTH IRA 

As I write this article, one quote from my kid’s favorite Christmas movie comes to mind, “keep the change you filthy animal.” The Secure Act 2.0 is being met with mixed feelings. It is viewed by some as an unexpected lump of coal, and to others as a special Christmas gift. The second edition of the Secure Act is a $1.7 trillion omnibus spending bill - 4,100 pages detailing dubious plans for spending that just don’t make sense to many ordinary voters.   

The Secure Act 2.0 presents numerous changes to existing retirement savings and withdrawal rules.  Let’s look specifically at how it changes the valuable retirement investment tool of the Roth contribution.   

What is a Roth IRA? 

A Roth IRA is a personal retirement savings plan that offers certain tax benefits to encourage retirement savings. What are those tax benefits? A Roth IRA grows tax deferred, but unlike a Traditional IRA, if certain conditions are met, distributions (including both contributions and investment earnings) will be completely tax-free at the Federal level. Let’s look specifically at the language in the Secure Act 2.0 and look at three sections that will impact the Roth IRA.  

SECTION 107: Increase in RMD AGE to 73 and 75. 

Current law has the age for Required Minimum Distributions set at 72. The Secure Act 2.0 would move the RMD age to 73 for anyone reaching this age in 2023. If you reached age 72 in 2022, you are subject to the age 72 RMD. And then on January 1, 2033, the applicable RMD beginning age will be 75. 

This change makes Roth conversion planning opportunities a very important topic to discuss with your Whitaker Myers Wealth Managers financial advisor. Pushing back the RMD age gives people more flexibility over when to spend their money, more planning opportunities for Roth conversions, and an increased ability to create intelligent spending strategies from their taxable retirement accounts. This conversation will allow you and your advisor to look for low-tax rate years where you can do some conversion from a traditional IRA or retirement account to a Roth IRA and keep taxes low. 

SECTION 126: 529 to Roth Accounts  

The SECURE Act 2.0 creates a way to do a tax and penalty-free rollover from a 529 account to a Roth IRA under certain conditions. Currently, money in a 529 that’s distributed for non-education expenses can be subject to penalties and taxes. 

Under the new provision, beneficiaries would be able to do a rollover of up to $35,000 aggregate in life from a 529 to a Roth IRA in their name. These rollovers would have to abide by the Roth IRA annual contribution limits and the 529 would need to have been open for at least 15 years.  The income limitation to contribute to a Roth IRA is removed for the 529 to Roth IRA rollover. 

This change removes the uncertainty of what happens if you were to overfund a 529 or if your kids don’t need it.  If you overfund your child’s 529, your child gets a scholarship, or your child doesn’t go to school that money can now be used for the child’s retirement inside of a Roth IRA.  This may be another possible topic to talk to your Whitaker Myers Wealth Managers financial advisor about when you consider how to start saving for your child’s education.  

Section 604: Employer Matching can be Roth or Pre-Tax 

The Secure Act 2.0 will allow employers to let participants in 401(k), 403(b), and governmental 457(b) plans to get matching contributions on a Roth basis. It doesn't require plans to offer this but creates it as an option. 

This provision allows for matching contributions to go into a Roth account. This can make sense for many lower-income employees that don’t benefit that much from tax deferral, especially early in their careers. Roth tax treatment can give them a better overall tax outcome. Because this is at the discretion of the employee, it gives additional savings and tax management flexibility. 

In Conclusion with the Secure Act 2.0.  

When analyzing this complicated and lengthy bill, experts conclude that there is a focus by the legislature on specifically Roth accounts.  Why?  Roth contributions push tax revenue forward for the government.  The Secure Act 2.0 provides plenty of additional tax flexibility as you choose between Roth or tax-deferred accounts. Moving forward, those saving for retirement and their Whitaker Myers Wealth Managers financial advisors will have more control over how their money is taxed than they did under the prior law.   

 

Author: Ryan Hoovler

 
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