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Thoughts on Roth & SECURE 2.0

Thoughts on Roth & SECURE 2.0

| January 26, 2024

I found myself pondering three Roth provisions in SECURE 2.0. Bottom line? I can't say I am a fan. Here's why.

The first provision

Casually referred to as the Roth Catch-up provision, this provision, under Section 603, requires 401k/ 403b catch-up contributions made by employees 50 and older to be made as Roth contributions. Two thoughts come to mind here. First, if a 50+ old employee is making catch-up contributions (ie, in 2024, putting in more money that the base $23,000 contribution), that employee's salary might be high and said employee might be trying to reduce their income tax bill. Forcing the catch-up to Roth defeats the purpose.

Second, the catch-up contribution might have come about during the annual plan testing. The Third Party Administrator might have felt that reclassifying some of a 50+ year old's regular contributions as "catch-up" might be beneficial to the overall plan non-discrimination test results. Forcing that portion into the Roth bucket has tax implications and can be a logistical challenge for the TPA.

Thankfully this provision has been postponed under IRS guidance from January 1, 2024 to January 1, 2026.

The second provision

Under Section 604, qualified plans may amend their plan documents so that plan participants may elect to receive employer match contribution or non-elective contributions as Roth. While I understand this on principal (ie, concerned that tax rates could be higher in the future), I can see how record-keeping systems could have troubles keeping track of this. Also, plan participants would be taxed match and/ or non-elective contributions and might not have anticipated paying that much in extra tax.

The third provision

This provision allows unused money in a 529 College Savings Plan to be rolled into a Roth IRA if it was not used by the beneficiary and if the 529 has been open for at least 15 years. Also, if too much was contributed to a 529, the excess can be moved into a Roth IRA again subject to the 15 year rule. I can see a bit of a paperwork/ tracking struggle as well as challenges in getting the reporting right.

I am not a tax expert but I certainly will be interested in seeing if the first provision is delayed further. The second provision may not see high adoption rates. And the third provision may be something that falls outside of the 401k advisor's wheelhouse. Most 401k advisors whose practices are 90%+ focused on the retirement plan arena are not focused on 529 plans.

Independent Financial Group (IFG) does not give tax advice. IFG Registered Representatives (RR) do not give tax advice while acting as an RR. These matters should be discussed with your tax professional.