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Let's Get "Rothical, Rothical"

Dear Clients and Friends,


In my debut MORWM Weekend Reading, I provided a brief overview of the

major changes that were included in SECURE 2.0 (Setting Every Community

Up for Retirement Enhancement Act), which President Biden signed into law

on December 29th. That article can be found here

[https://www.morwm.com/blog]. Now that some time has passed and the bill

has been thoroughly reviewed, it seems that there’s one major lesson to be

learned from this piece of legislation: Congress loves Roth style accounts and

continues to “Roth-ify” the retirement planning landscape.


Let’s do a quick synopsis of Roth accounts: contributions are made with aftertax

dollars, so you don’t get an immediate tax deduction. After meeting some

requirements, your funds can be withdrawn tax free in the future. Thus,

Congress collects tax revenue upfront, which benefits them when it comes to

coordinating their annual spending projections and introducing policy.


Interestingly enough, SECURE 2.0 didn’t place any restrictions on, or outright

eliminate, the notorious “backdoor” Roth IRA strategy, which seemed to be on

the chopping block when President Biden introduced his Build Back Better

Agenda in 2021. This strategy is essentially a loophole that allows high-income

earners to bypass the IRS’s income limits and make contributions to a Roth

account through some “wizardry.”


I outline some of SECURE 2.0’s major Roth provisions below.


Say Arrivederci to RMDs: Effective in 2024, Secure 2.0 will eliminate Required

Minimum Distributions from Roth-style accounts in qualified retirement plans

such as a 401(k) and 403(b). Account owners were previously required to take

RMDs from these accounts as opposed to Roth IRA’s which didn’t require

minimums to be withdrawn. As a reminder, there are no income restrictions on

these qualified retirement plans, whereas Roth IRAs do have income

restrictions when contributing.


Roth SIMPLE & SEP IRA Accounts: Personally, speaking - Hallelujah! Taxpayers

and investors will have two brand new opportunities when making their Roth

contributions. Prior to the passage of SECURE 2.0, pre-tax contributions were

the only options for SEP and SIMPLE IRA accounts. Although folks now have

access to two new Roth accounts, it’s going to take some time for the financial

institutions, custodians, employers, and the IRS to re-draft their policies and

procedures, update paperwork, and implement these changes. Patience is a

virtue.


Employer Contributions: Effective immediately, employers now have the option

to make matching contributions to Roth accounts for their employees. Since

these contributions are considered “income,” they will be reported on an

employee’s W2 for the following year; thus, careful liquidity and tax planning

needs to be considered if the employer match is substantial. Again, it will take

time for employers and custodians to catch up and adapt these new

provisions.


Catch-Up Contributions Mandate: Beginning in 2024, individuals aged 50 or

older that made over $145,000 in wages from the same employer in the prior

year will no longer be allowed to make pre-tax catch-up contributions. Instead,

catch-up contributions will be made on a Roth, or after-tax, basis, so these

individuals will no longer receive an upfront tax deduction. Time and additional

guidance from the legislators will determine the exact impact of the phrasing,

but the terms wages and current employer are utilized very specifically here.


Technically speaking, self-employed individuals do not make wages, so it

appears that they are not subject to this mandate currently; they can continue

to make pre-tax contributions, regardless of their income. It’s a mystery as to

what the IRS’s rationale is when it comes to the different mandates between

employees and self-employed folks.


Despite the government’s push towards “Rothification,” people often wonder if

Roth accounts will ever be taxed in the future. It’s a fair question to ask, and

one that deserves merit. Since I’m not in the betting business, my simple

answer is: who knows?! Different political regimes swap control of Congress

while a revolving door of bills are introduced and defeated. When you take

SECURE 2.0 into consideration, it is clear that Congress is not trying to restrict

or limit an individual’s access to a Roth account. In fact, the opposite is true –

Congress has enhanced Roth accounts and made them an even more

attractive option for your hard-working dollars! The Investment Company

Institute reports that $439 billion was invested in Roth IRA accounts ten years

ago. At the end of 2022, the Institute estimated that a total of ~$1.2 trillion

was invested in Roth Individual Retirement Accounts, an increase from $1

trillion in 2019. That represents ~10% of American IRA balances are held in

Roth accounts. So now, the question is: to Roth or not to Roth?


As always, reach out if you have any questions! All hail the Rothification!


Enjoy the holiday weekend,


Devin


https://www.ici.org/research/stats/retirement

https://www.ici.org/system/files/2022-07/ten-facts-roth-iras.pdf

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