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requirements, your funds can be withdrawn tax free in the future.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minimums to be withdrawn.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