Changes to the Secure Act 2.0 were signed into law at the end of 2022, and there’s a lot of changes to existing retirement savings and withdrawal rules. However, since so many people in their 50s and 60s, and even their 70s, wish that they had more money in their Roth accounts, I’m going to focus on what those changes to this new bill mean to Roth IRAs in a few ways that you might be able to actually get more into those accounts moving forward.
In my opinion, this is really good news – especially if you’re thinking about your retirement more, but really only if you know about it, know what the rules are, and then take advantage of it.
We’re going to go over six different changes here, and the first one has to do with Roth RMDs. So this first one applies to you if you’re keeping any money in your work retirement plans, like a Roth 401(k) or a Roth 403(b).
Right now, RMDs (required minimum distributions) are the amounts that we have to take out of these accounts. Those RMDs apply to your Roth 401(k)s and 403(b)s, which means you’re most likely forced to withdraw money from those accounts even if you don’t want to when you get into your 70s. After 2023, there will no longer be RMDs for those types of Roth accounts, meaning no Roth RMDs for those accounts while you’re living.
After you pass away, the people who inherit your Roths will have to start doing these RMDs. While you’re living, those should be removed or those should be going away. As you might know right now, if you’ve got just a regular Roth IRA, you aren’t forced to take out and you aren’t forced to do RMDs from those accounts. However, if you liked your custodian or if you liked the 401(k) or 403(b) where your money is now, and you’re going to have that in retirement, usually in the past you would then have to take money out of there.
Previously, a lot of people would roll over accounts to Roth IRAs, but now it’s just one less thing that you have to think about. And again, after the account owner dies for these accounts, the same rules apply to Roth IRAs and Roth accounts as they did before the Secure Act 2.0.
The next change will come into play if you’re helping pay or want to help pay for your grandkids’ college, or maybe paying for your kids’ college through the use of a 529 education account; or if you already have a 529 and everyone’s already out of college. Currently, money from a 529 that’s taken out for things other than education costs can be taxed and penalized, but moving forward, under certain conditions, this Secure Act 2.0 adds a new way to move money from a 529 to a Roth IRA without paying those taxes or penalties.
That means that beneficiaries would be able to move up to $35,000 from a 529 into a Roth IRA in their name. Now, the rollovers would be limited to the Roth IRA’s annual contribution limit so each year you’d have to do rollovers. Then the 529 would have to be opened for at least 15 years.
Let’s say that you’re contributing to your grandkids’ future college. You’ve got a five-year-old grandchild right now, and they turn out to be a genius just like you thought and get a full ride to college. That money that you put into the 529 isn’t going to be used for college expenses.
This rule then could apply and you’ve got that $35,000 rollover potential to a Roth IRA. The thing that we don’t want to have happen is contributing to a 529, and then nobody using it for college costs, and then taking it out and having to pay the tax or penalty. This is a nice little added bonus for the Secure Act 2.0.
A few rules around that one – earnings and contributions would be treated like any other Roth account or rollover. However, the income limitations to be able to contribute to a Roth IRA is removed for the 529 to Roth rollover, but the annual contribution limit remains the same. Talk to a financial professional or CPA if you’re thinking about how this could work for you.
Now, this next rule or change is a good one for someone who’s self-employed or works for a small company that doesn’t offer a 401(k), but offers either a SIMPLE IRA or a SEP IRA. This could also be good for someone who has a regular job and a side hustle that’s earning some income, or maybe is thinking about having some sort of side hustle in retirement.
Right now, you cannot put money into a Roth with a SIMPLE or a SEP IRA. Those are two types of accounts you could open up if you’re self-employed. That’s going to change though under this bill, which would make it possible for a SIMPLE plan or SEPs to accept Roth contributions, which is nice because when we’re thinking about small businesses or earning extra income in retirement, typically it’s not big money we’re talking about.
Hence, not a lot of it is going to be taxed if that’s the case, and this will just allow you to get more money into a Roth as a result, which is a nice bonus.
This change is related to you if you’re over the age of 50 because it has to do with catch-up contributions to your 401(k)s or 403(b). And this is a negative change in my opinion.
Say you have $145,000 in your Roth 401(k) already and you make a catch-up contribution of $7,500. The new rule says that it has to be Roth. The reason why I think this is a negative is because it gives us a little bit less control. For example, if you’re 55 and you have over 145K in your Roth 401(k) right now and you make a catch-up contribution, you might also have a higher income right now than you will in retirement. Therefore it could make sense to do a pre-tax catch-up contribution instead of a Roth. It’s not a huge deal, but it’s just a little optimization.
The next one is a change to employer matching. Employers will be able to match contributions now to 401(k)s and 403(b)s and government 457 plans on a Roth basis, whereas before it was always pre-tax basis. This change doesn’t force plans to offer this, but it does make it possible for them to do so, whereas before that was not the case. If you’re employed and they offer this, it could make sense if you want to get more into Roth.
This next one is one where you might think, “How does this impact my Roth IRA or getting more into it?” But it’s around this Roth conversion strategy.
Last year, the RMD (required minimum distribution) age that you had to start taking out of your pre-tax monies was 72. Now with the Secure Act 2.0, the minimum age for distributions to start would go up to 73. That’s for people who reach that age in the year 2023 and beyond. What does this have to do with Roth money?
You might have seen another video that I did on the Roth conversion sweet spot, which talks about the best ages to convert from your IRA to Roth with the main goal of paying the least amount of tax over your lifetime. That’s what we’re trying to do for many of our clients. By pushing back the RMD age to 73, that gives you a little more control over when and how much you decide to convert; spreading out conversions could really mean thousands of dollars in tax savings to you in some cases.
As you’re thinking about Roth conversions, check out the DIY retirement planner. Part of the planner is really focused on Roth conversions and setting up a potential plan for you. As always, be sure to talk to your financial team before making any big decisions like this because there’s so many different moving parts and components to do something that fits you just right. If you’d like to reach out to us, you can do so by clicking here. We sometimes get inundated with a lot of requests and calls, but we can get back to you either way just to share what’s happening over here.
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