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Secure Act 2.0—Rothification Thumbnail

Secure Act 2.0—Rothification

Insights Tax Planning Retirement Planning Investing


During the last two weeks of 2022, the US Legislature passed what is known as SECURE Act 2.0.  It has many provisions and complexities.  But one of the biggest is the expanded use of Roth-type savings provisions.  We call it Rothification.  From SIMPLE IRA plans, to catch-up contributions, to electing Roth treatment of employer contributions, there are more opportunities than ever to take advantage of this provision.  Let's dig in to the new Rothification provisions.

Watch Now: Secure Act 2.0—Rothification

  • 0:00 - Intro, Disclaimer, Welcome
  • 0:33 - Rothification - what is a Roth IRA/401k
  • 2:04 - Adding Roth provisions to SIMPLE Plans
  • 3:07 - Catch-up Contributions
  • 4:26 - Employees can elect Roth treatments for certain employer contributions
  • 6:04 - Knowing your numbers and understanding the tradeoffs
  • 7:04 - Outro

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Understanding Roth IRA/401k Provisions

When you are saving for retirement, you have a choice.  Do you take a tax deduction for your contributions today or do you save on an after tax basis?  Roth IRA's began in 1997, and the provisions for these types of accounts allow for some very attractive advantages.  If you make qualified withdrawals from a Roth type account, the distributions are not taxed.  Qualified withdrawals are those made after the account has been open for at least 5 years (or 5 years after a Roth conversion), and you are at least age 59 1/2.  

If you take the tax deduction for your contributions, your money grows tax deferred.  When you take distributions from the account, all of that is taxed as ordinary income.  There are no preferential capital gains or qualified dividends inside of a traditional IRA or 401k.  

What the Secure Act 2.0 Changed - SIMPLE Roth IRA's

A SIMPLE IRA is a type of retirement plan offered by some small businesses.  SIMPLE is an acronym which represents Savings Incentive Match Plan for Employees.  They have strong similarities to 401k plans, but there are some key differences.  

  • They are only available to Employers with 100 or fewer employees.
  • They have lower contribution limits.
  • They have fewer "strings" attached to the employees account balances (no vesting).
  • They have simpler eligibility requirements.

Prior to the passage of this version of the Secure Act, employees could only make salary deferral contributions on a pre tax basis.  They received the tax deduction for their contribuitons.  This new legislation has now created the opportunity for those employees to save in those plans on an after tax, or Roth, basis.

Better Catch-Up Contributions

A few years ago, the tax laws were changed to allow people who attained age 50 to contribute more than the annual limits to their retirement savings.  IRAs and other employer sponsored retirement plans have provisions for bigger contributions.  Beginning in 2025, people who are 60 to 63 year's old can contribute even more.  

Because these catch-up contributions are indexed for inflation, the enhanced contribution limit for this group is the larger of $10,000 or 150% of the 2024 catch up limit.

Whether you want to take advantage of those expanded limits or not, you need to be aware of something.  If your combined income is greater than $145,000 (as a married couple) your catch-up contributions will automatically be treated as Roth type contributions.  From our experience, most people making the catch-up contributions would fit this criteria.  Be prepared for a bit of a tax shock in 2025.

More Rothification Please! - You can choose to treat certain types of employer contributions as Roth.

Many types of retirement plans feature an employer match or what is called a non-elective contribution.  If either of those contributions are fully vested when they are made, the employees can elect to treat them as Roth contributions.  But there is a catch.

The matching contribution or non-elective contribution is a business expense.  This means the employer receives a tax deduction for making those deposits on behalf of their employees.  In the world of "pre-tax" contributions, the employees would pay the taxes on the contributions (and the earnings) when they took distributions from their accounts.

If an employee elects to treat the employer deposits as Roth contributions, they will add that amount to their earned income.  This means they pay taxes on this amount in the year the matching contributions were made.  The potential benefit is the same as other Roth contributions, growth that won't potentially be taxed in the future.

Roth contributions vs Tax Deductible Contributions - which is better?

There are many factors to determining whehter you should use Roth contributions or deductible contributions.  As with many financial decisions, there is a trade-off.   Here are just a few: 

The key thing:  look at your numbers.  And we have the tools to help you with that process.  You can reach out to one of our advisors below who can help you work through the math.

Appearing in this episode...

Daniel Spurgeon, CFP®

Daniel is a financial advisor in Parkersburg, WV.

Andy Dollman

Andy is a financial advisor in Parkersburg, WV.

Neal Watson CFP®

Neal is a financial advisor in Marietta, OH.