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What is mandatory and what is not for 2024 Roth retirement plans?

    November 8, 2023

    2024 Roth Changes

    The Secure Act 2.0 was signed into law on December 29, 2022, bringing more major changes to tax law. Among the most notable changes include a significant step toward 'Rothification' through expanded use, new requirements, and even a way to move money from college savings accounts to a Roth IRA. Here are the top five Roth-related retirement changes following the passing of Secure Act 2.0.

    5 new changes to Roth accounts in Secure Act 2.0

    1. 529 plan to Roth IRA rollovers

    The lifetime rollover limit is $35,000. Annual rollover limit is pegged to the yearly IRA contribution limit, which includes contributions made to any IRA. In addition, the amount rolled over plus annual IRA contributions cannot exceed the designated beneficiary’s earned income for the year.

     

    2. No required minimum distributions (RMDs) in Roth 401(k) plans

    Prior to the passing of Secure Act 2.0, only Roth IRAs allowed the original account owner to skip lifetime RMDs. Employees who saved in a Roth 401(k), and never rolled the funds over to a Roth IRA were still subject to mandatory withdrawals at RMD age. Starting in 2024, individuals who left assets in a Roth employer plan won’t be subject to mandatory distributions during their life. However, for the beneficiary, this is still a different story.

    3. Catch-up contributions required to be Roth

    Another major change in Secure Act 2.0 is the requirement that plan participants age 50-plus make catch-up contributions to a Roth account.² Currently, pre-tax or Roth contributions are allowed. The new rule offers an exception for workers who earned less than $145,000 (indexed) the previous year for the same employer.

    The changes will apply to 401(k), 401(a), 403(b), and 457(b) plans starting in 2024. The Act stipulates that unless a plan allows catch-up contributions in Roth accounts, then no one in the plan can make catch-up contributions. Due to the added administration and expense of permitting Roth contributions, many small 401(k) plans don’t currently offer a Roth option.

    4. Optional treatment of employer contributions as Roth

    Before the passing of the Act, employer funding could only be pre-tax. Now, 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.

    5. SIMPLE and SEP IRAs may 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 a Roth options. The IRS must still pave the way for this by issuing additional guidance. Then, employers need to update plan documents, so again, it may take time to truly be in effect.

    5 Big Changes To Roth Accounts In Secure Act 2.0 (forbes.com)

     

    Commentary by: Raylea Stelmach

    Edited by:

     

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