Long Live the Roth: What Every Investor Needs to Know About the SECURE Act 2.0

The new SECURE Act is out. Version 2.0 will replace the 2019 version, and it brings with it some interesting, and potentially surprising, new provisions in favor of Roth accounts. The Consolidated Appropriations Act of 2023 was passed in December 2022, and signed into law by President Biden with the 2023 budget bill. The provisions under the act have come to be known as the SECURE Act 2.0. It was a much-awaited change and is intended to give employees and employers more opportunities as they help save and plan for retirement.

The SECURE Act 2.0 required minimum distribution (or RMD) changes and additional rules promise to offer people more options for building up tax-free savings for retirement. Many of the new provisions will go into effect in 2024 and beyond — and many companies and employers will need time to organize the logistics of changing the ways they contribute to retirement accounts, especially Roths. So, it is worth taking this time to get to know how the new SECURE Act and Roth IRA accounts work together.

The main thing to note about the new regulations is that they haven’t changed planning for most individuals as drastically as previous acts, even though they introduce 90 new provisions. In 2019, when the SECURE Act was originally signed into law, it introduced a big shift in the distribution options available to beneficiaries of qualified retirement accounts. Specifically, non-spouse beneficiaries of qualified retirement accounts were no longer able to “stretch” distributions across their lifetimes; rather, the original SECURE Act required that they empty the account within 10 years.

The new SECURE Act 2.0 contains no such shift, and the SECURE Act and Roths seem to be on good terms. But what does this all mean for employers, employees, and retirement savers in general?

What SECURE Act 2.0 Changes Should Investors Know About?

The new SECURE Act 2.0 has several provisions that involve Roth accounts. Investors will want to get up to speed on these and understand how they impact their retirement savings. Here we have some of the more noteworthy changes to be aware of:

1. RMDs for employer Roth accounts are eliminated.

According to the SECURE 2.0 RMD changes, Roth accounts in qualified employer plans will not incur RMDs beginning in 2024. This will apply to plans such as Roth 401(k)s, Roth 403(b)s, governmental Roth 457(b)s, and the Roth component of the federal Thrift Savings Plan. The current RMD rules state that Roth IRAs attached to employer plans are subject to regular RMD rules, but from 2024, all Roth accounts will avoid RMDs.

2. Additional employer contributions are eligible for Roth accounts.

Effective immediately, the SECURE Act 2.0allows employers to let employees elect that employer matching contributions be made to the employee’s Roth accounts. The contributions can’t be subject to change, like contributions that are part of a vesting schedule. This provision is optional, so employers might still continue to make pre-tax matches (or no matches at all!).

3. Some contributions will be required to go into a Roth IRA.

Beginning in 2024, catch-up contributions made by high-wage earners will be required to use a Roth option. “High-wage earners” in this case means those who earned more than $145,000 (indexed for inflation) in the prior year from the same employer, so there might be exceptions for workers with fluctuating incomes or who change jobs midyear. This new rule applies to 401(k), 403(b), and governmental 457(b) plans but does not include catch-up contributions to IRA accounts.

4. A 529 plan can roll over to a Roth IRA.

The SECURE Act 2.0 will enable beneficiaries of 529 accounts (used for qualifying education costs) to roll their savings over into a Roth IRA. This new provision has some caveats that are worth paying attention to. First, the 529 plan must have been open for at least 15 years, and recent contributions (those paid in the last five years) are ineligible. Transfers will be counted toward the 529 plan beneficiary’s own IRA contribution limit with a cumulative lifetime transfer limit of $35,000. With the many restrictions in place, most will find this new provision a welcome solution to 529 plan funds that are not needed for education as opposed to a strategic planning alternative.

5. The back door Roth lives on.

While not exactly a change, the fact that the new SECURE Act 2.0 rules have not eliminated the “back door Roth” is significant and surprising. A back door Roth is a strategy for getting the most out of a person’s savings if their earnings are too high for a Roth IRA. It involves first making a nondeductible IRA contribution and then transferring assets from a traditional IRA to a Roth IRA, thereby converting the traditional account into one that will both grow and ultimately be distributed tax-free.

With 90 new provisions and rules that seem to favor Roth account holders and their families, savers should take some time this year to assess, and potentially reassess, their estate planning and investing strategies. Could you be saving more for retirement than you realize? If you are asking yourself this, then seek out a financial advisor to ensure you are saving the most for retirement in light of the new provisions of the Secure Act 2.0.

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(Featured image by Tima Miroshnichenko via Pexels)

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