Roth IRA Changes Under SECURE ACT 2.0
By Sean Condon, CFP®
The Roth IRA is perhaps the most attractive retirement savings vehicles for investors. Unlike traditional IRAs which providetax-deferredgrowth (you pay the tax eventually), Roth IRA assets growtax-free. Assets with this favorable tax characteristic can provide desirable flexibility in retirement years, where the future state of tax rates is very uncertain. The Roth IRA protects you from paying future income taxes, and this protection also continues for your heirs.
Because Roth IRAs are so attractive, there are many strategies used to navigate income limits on contributions and to maximize the benefit of a Roth Conversion. In December 2022, the SECURE Act 2.0 of 2022 was revised as President Biden placed the second iteration of this retirement act into law. The law creates even more new rules and applicable strategies related to Roth accounts. The bill will impact all Roth investors, and as long as you understand it the rules can make it easier for you to save with tax advantages.
This article will explain what the changes are, how they could affect you, and how you can make the most of them.
SECURE 2.0 also changes the rules around RMDs for Roth contributions in employer-sponsored retirement accounts. Starting in 2024, Roth accounts will no longer be subject to the RMD requirement. The act also expands Roth eligibility to SIMPLE and SEP IRAs starting in 2023.
1. Roth Contributions Now Allowed by Employers
Many 401(k) plans offer employees the option to put away money as a Roth contribution. Up until now, all employer matching or profit-sharing contributions have been made as a traditional, tax-deferred contribution. The SECURE 2.0 Act provides greater opportunities for employees by allowing them to elect employer contributions as Roth contributions.
Effective December 29, 2022, employers may allow plan participants to designate employer matching and nonelective contributions as after-tax Roth contributions. Such contributions would be included in the participant’s taxable wage income for the year made. Employer contributions designated as Roth contributions must be immediately 100% vested.
Though this might take some time for employers and payroll companies to implement, this option will allow employees to choose whether their matching contributions are taxed up front (Roth) or in retirement (traditional).
2. Catch-Up Contributions Must Be Made as Roth Contributions
Starting in 2024, employees who are 50 and older with wages above $145,000 (indexed for inflation) will be required to make any catch-up contributions to a Roth account, effectively eliminating the current-year deductibility of those contributions. The 2024 catch-up contribution limit for workers age 50 and up is $8,000. Previously, this catch-up amount was allowed to be made on a traditional, tax-deferred basis. Lower-paid employees may still contribute catch-up contributions on a pre-tax basis.
The SECURE 2.0 Act adds a “special” catch-up contribution limit for employees 60 to 63 years of age starting in 2025. The special catch-up contribution maximum for these workers will be the greater of $10,000 or 150% of the “standard” catch-up contribution amount for 2024. The $10,000 amount will be adjusted for inflation each year starting in 2026.
3. Roth Contributions Now Allowed for SIMPLE and SEP IRAs
Effective for taxable years beginning after December 31, 2022, SIMPLE IRAs and SEP IRAs can accept Roth (i.e., after-tax) contributions. In addition, employers can offer employees the ability to treat employee and employer SEP contributions as Roth contributions (in whole or in part).
4. Unused 529 Funds Now Allowed to Rollover to Roth IRA
Many Americans save for college education through 529 accounts, which allow up to $18,000 in gift-tax-free contributions per year, or $90,000 if the lump-sum election is selected. Contributions grow tax-free if they are used for eligible education expenses. If they are used for an unqualified expense, the earnings are taxable, and the distribution is subject to a 10% penalty.
This is where rollovers come in. The new SECURE 2.0 provisions allow unused 529 funds to be rolled over into a Roth IRA starting in 2024, which means that they can now be used for retirement and not just college. There are some strict limitations to this new rule, including:
- There is a lifetime rollover cap of $35,000.
- Rollovers are still subject to the annual Roth contribution limit ($7,000 in 2024), so it may take multiple years to completely roll over the funds.
- The rollover must be made to the 529 beneficiary’s Roth account (typically the student), not the 529 account holder’s Roth (typically the parent).
- The 529 must have been open for at least 15 years.
- Contributions and earnings made in the last 5 years cannot be rolled over.
Let Us Answer Your Questions About SECURE 2.0
We understand that the SECURE 2.0 Act of 2022 is a complex piece of legislation, and it can be difficult to understand how it applies to you. At Windgate Wealth Management, we can help you navigate these changes to make the most of the new savings opportunities available in the context of your overall plan. We are committed to helping you understand the Act and are here to help answer your questions, so please don’t hesitate to reach out. To get started, you can call us (844) 377-4963 or email [email protected]. You can also book an appointment online here.
FAQs
The new SECURE 2.0 provisions allow unused 529 funds to be rolled over into a Roth IRA starting in 2024, which means that they can now be used for retirement and not just college. There are some strict limitations to this new rule, including: There is a lifetime rollover cap of $35,000.
What are the changes in the Secure Act 2.0 Roth IRA? ›
Under section 604 of the SECURE 2.0 Act, plans can allow employees to designate certain matching and nonelective contributions made after Dec. 29, 2022, as Roth contributions. These contributions are not subject to withholding for federal income tax, Social Security or Medicare tax.
What are the changes to Roth IRA in 2024? ›
For 2024, the total contributions you make each year to all of your traditional IRAs and Roth IRAs can't be more than: $7,000 ($8,000 if you're age 50 or older), or. If less, your taxable compensation for the year.
What are the new rules for Roth IRAs? ›
If you file taxes as a single person, your Modified Adjusted Gross Income (MAGI) must be under $153,000 for tax year 2023 and $161,000 for tax year 2024 to contribute to a Roth IRA, and if you're married and filing jointly, your MAGI must be under $228,000 for tax year 2023 and $240,000 for tax year 2024.
Will Backdoor Roth be eliminated in 2024? ›
Is backdoor Roth still allowed in 2024? Yes. Backdoor Roth IRAs are still allowed in 2024. However, there has been talk of eliminating the backdoor Roth in recent years.
What are the changes to the Secure Act 2.0 2025? ›
Long-term part-time employees receive expanded eligibility
Prior to the SECURE Act 2.0, employees who worked between 500 and 999 hours for three consecutive years were required to be allowed to participate in their company's retirement plan. The SECURE Act 2.0 reduces the time period to two years, effective in 2025.
What is the Secure Act 2.0 for Roth simple IRAs? ›
Under SECURE 2.0 Act section 601, a simplified employee pension (SEP) arrangement or a savings incentive match plan for employees (SIMPLE) IRA plan may allow an employee to designate a Roth IRA as the IRA to which contributions under the arrangement or plan are made.
What are the updates for Secure Act 2.0 in 2024? ›
SECURE 2.0 is increasing the maximum amount you can make in catch-up contributions each year, based on the type of retirement account you have. If you have an IRA and are older than 50, you can contribute a total of $8,000 in 2024 (including a $1,000 catch-up contribution). This is an increase of $500 compared to 2023.
What happens to Roth IRA if you exceed your income limit? ›
The IRS puts annual income limits on a Roth IRA. When you exceed that limit, the IRS generally charges a 6% tax penalty for each year the excess contributions remain in your account. This is triggered at the time you file each year's taxes, giving you until that deadline to remove or recharacterize the misplaced funds.
What is a backdoor Roth IRA? ›
Backdoor Roth IRA: A backdoor Roth IRA is a strategy for high-income earners who exceed Roth IRA contribution income limits. It involves making non-deductible contributions to a traditional IRA and then converting those funds into a Roth IRA. This allows high allows high earners to take advantage of Roth IRA benefits.
The new SECURE 2.0 provisions allow unused 529 funds to be rolled over into a Roth IRA starting in 2024, which means that they can now be used for retirement and not just college. There are some strict limitations to this new rule, including: There is a lifetime rollover cap of $35,000.
What are the rules for Roth IRAs for seniors? ›
You can make contributions to your Roth IRA after you reach age 70 ½. You can leave amounts in your Roth IRA as long as you live. The account or annuity must be designated as a Roth IRA when it is set up.
What is the 5 year rule for Roth IRAs? ›
This rule for Roth IRA distributions stipulates that five years must pass after the tax year of your first Roth IRA contribution before you can withdraw the earnings from the account tax-free. Keep in mind that the five-year clock begins ticking on Jan. 1 of the year you made your first contribution to the account.
How does the rich man's Roth work? ›
Despite the nickname, the “Rich Person's Roth” isn't a retirement account at all. Instead, it's a cash value life insurance policy that offers tax-free earnings on investments as well as tax-free withdrawals.
Will Roth IRA be discontinued? ›
The Roth IRA program is growing rapidly, making ever-larger contributions to the nation's economy. We can rest assured the government has no interest in ending the program, which is exactly what would happen if withdrawals were made taxable.
Will backdoor Roth be banned? ›
No, the backdoor Roth is not considered illegal. The IRS does not classify the backdoor Roth as a form of tax evasion but could best be described as a form of tax avoidance. If you have any misgivings about this financial maneuver in a specific situation, you can consult a more experienced tax professional.
What is the Secure Act 2.0 for Roth IRA conversion? ›
The new SECURE 2.0 provisions allow unused 529 funds to be rolled over into a Roth IRA starting in 2024, which means that they can now be used for retirement and not just college. There are some strict limitations to this new rule, including: There is a lifetime rollover cap of $35,000.
What is the Secure 2.0 Roth catch up? ›
Section 603 of SECURE 2.0 had originally required catch-up contributions made to a qualified retirement plan — such as 401(k), 403(b), or 457(b) plans — by higher income employees (who earned $145,000 or more in the prior year) to be made on a Roth basis beginning January 1, 2024.
What are the new rules for inherited Roth IRA distributions? ›
The 10-year rule requires that all assets in the inherited IRA must be fully withdrawn by the end of the 10th year following the original IRA owner's death. (If the death occurred in 2019 or earlier, the 10-year rule was a five-year rule.)
What are the new Roth contributions? ›
Roth IRA contribution limits for 2024
The Roth IRA contribution limit for 2024 is $7,000 for those under 50, and an additional $1,000 catch up contribution for those 50 and older. Source: "401(k) limit increases to $23,000 for 2024, IRA limit rises to $7,000," Internal Revenue Service, November 1, 2023.
