New York (CNN) Secure 2.0, the new retirement rules lawmakers passed in late December, includes several provisions that make the tax-free savings vehicle known as Roth more accessible and flexible. And in one case, it will require some higher earners to put a portion of their 401(k) savings in a Roth account.
The value of a Roth IRA — or a Roth 401(k), now offered as an option in nearly 90% of employer-funded plans and has no income caps — is to let your money grow and then be withdrawn tax-free in retirement.
Roth Sparen can be beneficial if you expect to be in a higher tax bracket than you are now for at least a few years after retirement. And with the frequency of tax law changes, a tax-free source of money gives you more financial flexibility.
The consideration: Your contributions are taxed in the year in which you make them. When saving, on the other hand, there is a deductible IRA or 401(k), you get a tax deduction for your contributions in the year you make them, however then pay taxes on them – plus any growth from the investments you made with them – when you withdraw the money.
How Secure 2.0 expands access
Here are four key Roth-related changes in the new Pensions Act.
Catch-up contributions for higher earners: If you are at least 50 years old and maximizing your contributions to your 401(k), you may save an additional $7,500 in catch-up contributions.
However, if you earn $145,000 or more as of 2024, the new law requires those catch-up contributions to be treated as Roth contributions and therefore taxed in the year you make them. This would also be the case if your contributions were paid on a pre-tax basis up to the federal annual limit.
Beginning in 2025, the new law will raise 401(k) catch-up contribution limits to $10,000 for people ages 60, 61, 62 and 63.
One issue to keep an eye on this year: There is an editorial error in the law that would ban the right to catch-up contributions after 2024. Therefore, lawmakers must either make a technical correction in the law, or the Treasury Department and IRS must issue regulatory guidance to schedule sponsors to clarify that catch-up contributions should be allowed, said Brigen Winters, director and head of policy practice at the Groom Law Group.
SIMPLE and SEP IRAs: Both SEP IRAs and SIMPLE IRAs – used by small businesses – may now be referred to as Roth IRAs if a small business owner chooses to do so. The rule went into effect this year.
Employers and Non-Eligible Matches in 401(k) Plans: Currently, even if you make your contributions to a Roth 401(k), any matching contributions from your employer are still treated as deferred taxes, meaning you will not be taxed until you begin receiving distributions from your account.
The new law allows employers to allow plan participants to transfer their matches to a Roth account as pre-tax or post-tax if those matches are deemed fully vested. Fully vested means the money is yours when you leave the company. Some employers fully vest their matches within the first year or two of an employee’s tenure. Others may only treat games as fully vested in years three, four, or five.
Additionally, starting in 2024, another new provision in Secure 2.0 will allow employers to match an employee’s student loan payments and invest those surcharges into a retirement account for the employee. (This can be especially helpful when employees are struggling to save for retirement while paying off their loans.)
Even in the case of these non-selectable adjustments, employees can be given the choice of making the adjustment on a Roth basis before or after taxes.
Distribution Rules: One of the advantages of having a Roth IRA while you’re alive is that you don’t have to take annual distributions from it if you don’t want to. That’s not the case if you have a Roth 401(k) – this account is subject to all the required minimum payout rules that apply to retirees in their 70’s. The only way to fix this is to turn your Roth 401(k) money into a Roth IRA.
However, starting in 2024, your Roth 401(k) will no longer be subject to the required minimum distribution rules.
That can be an advantage, Winters said, if you like the investments offered in your 401(k) plan and if they have a lower cost than what you might find managing your own IRA in a brokerage account.