Tag Archives: roth

The SECURE Act 2.0: The Most Impactful Provisions #10 — Moving 529 Assets to a Roth IRA


IRA, SECURE 2.0
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Key Takeaways

  • Prior to the SECURE Act 2.0, if a 529 plan beneficiary did not use all of the funds for qualified education expenses (for example, the beneficiary graduated without using all of the funds in the 529), the options for withdrawal were not particularly attractive.
  • However, under the new law, those “excess’ funds can be transferred to a Roth IRA for the 529 beneficiary, subject to certain limitations.
  • As a result, contributions can now be made to 529 plans with the knowledge that, if not all of the funds are used for the education of the beneficiary, the excess funds can be transferred to a Roth IRA for that beneficiary (and the other options, such as transferring the money to a 529 for a different beneficiary remain available).

The President signed the Consolidated Appropriations Act, which included SECURE Act 2.0, on December 29, 2022.

SECURE Act 2.0 has over 90 provisions, some major and some minor; some mandatory and some optional; some retroactively effective and some that won’t be effective for years to come. One difference between the SECURE Act 2.0 and previous retirement plan laws is that many of 2.0’s provisions are optional…that is, plan sponsors are not required to adopt the provisions, but can if they decide that the change will help their plans and participants. This series discusses the provisions that are likely to be the most impactful, either as options or as required changes.

This article discusses one of the optional provisions that is available beginning next year, 2024. While most of my posts are about retirement plans and related issues, this is more of a financial planning matter, but it does include a retirement aspect, that is, a Roth IRA.

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The SECURE Act 2.0: The Most Impactful Provisions #9 — Roth Treatment for Catch-up Contributions for Higher Compensated


SECURE 2.0
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Key Takeaways

  • Prior to the SECURE Act 2.0 all older participants, regardless of compensation level, could deduct their catch-up contributions.
  • However, under the new law—beginning in 2024—participants who earn more than $145,000 will only be able to make Roth catch-up contributions.
  • As a result, those catch-up contributions will be taxable to those participants, but the contributions will not be taxable when withdrawn, and if held for the qualifying period, the earnings will not be taxable either.

The President signed the Consolidated Appropriations Act, which included SECURE Act 2.0, on December 29, 2022.

SECURE Act 2.0 has over 90 provisions, some major and some minor; some mandatory and some optional; some retroactively effective and some that won’t be effective for years to come. One difference between the SECURE Act 2.0 and previous retirement plan laws is that many of 2.0’s provisions are optional…that is, plan sponsors are not required to adopt the provisions, but can if they decide that the change will help their plans and participants. This series discusses the provisions that are likely to be the most impactful, either as options or as required changes.

This article discusses one of the mandatory provisions that becomes effective in 2024…catch-up contributions for higher compensated employees must be treated as Roth contributions.

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The SECURE Act 2.0: The Most Impactful Provisions (#5-Catch-up Contributions for Higher Compensated Must be Roth Contributions)


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Key Takeaways

  • The SECURE Act 2.0 requires that catch-up contributions for higher compensated participants be treated as Roth deferrals.
  • This provision is effective for tax years beginning after December 31, 2023 (that is, in 2024 for calendar year taxpayers).
  • Unfortunately, due to a drafting error in the legislation, the provision in the Code that permits catch-up contributions is repealed beginning in 2024. But technical corrections legislation may correct that.

The President signed the Consolidated Appropriations Act, which included SECURE Act 2.0, on December 29, 2022.

SECURE Act 2.0 has over 90 provisions, some major and some minor; some mandatory and some optional; some retroactively effective and some that won’t be effective for years to come. One difference between the SECURE Act 2.0 and previous acts is that so many of 2.0’s provisions are optional…that is, plan sponsors are not required to adopt the provisions, but can if they conclude that the change will help their plans and participants. This series discusses the provisions that are likely to be the most impactful, either as options or as required changes.

This article discusses one of the mandatory provisions—that catch-up contributions for participants who earn over $145,000 (indexed) must be treated as Roth deferrals. That is, the deferrals will be after-tax, but the withdrawals of those contributions will be tax-free and, if the Roth conditions are satisfied, the withdrawals of earnings will also be tax-free. In addition, the RMD rules do not apply to Roth accounts (and, as a result, withdrawals from Roth accounts can be deferred indefinitely until the money is needed).

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The SECURE Act 2.0: The Most Impactful Provisions (#4–Optional Treatment of Employer Contributions as Roth Contributions)


SECURE Act
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Key Takeaways

  • The SECURE Act 2.0 permits plan sponsors to give participants the option of receiving employer contributions on a Roth basis.
  • This provision is effective on the date of enactment, December 29, 2022.
  • However, the option may not be as attractive as it first appears, since the matching and nonelective contributions must be fully vested when made.

The President signed the Consolidated Appropriations Act, which included SECURE Act 2.0, on December 29, 2022.

SECURE Act 2.0 has over 90 provisions, some major and some minor; some mandatory and some optional; some retroactively effective and some that won’t be effective for years to come. One difference between the SECURE Act 2.0 and previous acts is that so many of 2.0’s provisions are optional…that is, plan sponsors are not required to adopt the provisions, but can if they conclude that the change will help the plan and the participants. This series discusses the provisions that are likely to be the most impactful, either as options or as required changes.

This article discusses one of the optional provisions—the ability of plan sponsors to permit participants to elect to receive matching and nonelective employer contributions on a Roth basis, meaning that the contributions would be taxed through to the participant when made, but that the contributed amounts would ultimately be distributed tax free and, if the Roth conditions are satisfied, the earnings would also be tax free. This provision was effective on the date on enactment of SECURE Act 2.0—December 29, 2022.

Continue reading The SECURE Act 2.0: The Most Impactful Provisions (#4–Optional Treatment of Employer Contributions as Roth Contributions) →

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