SECURE Act 2.0: What to Know About Roth Accounts

SECURE Act 2.0 (12/22) includes over 100 changes affecting many aspects of retirement plans and IRAs. Required Minimum Distributions (RMDs) are getting pushed back from age 72 to 75 (depending on your age), RMDs are being eliminated for Roth 401(k), 403(b) and 457(b) accounts, and many other changes. 

One of those other changes is that employers may now put matching contributions into Roth accounts in employer plans. A question that’s come up is “are employer matching contributions taxable,” and what does this look like from a tax impact to the employer and the employee? If the money goes into a Roth, is it still tax deductible to the employer? Yes, it still is. Does this mean that it’s going to be subject to FICA taxes? No, it won’t. So, the easiest way to think about this conceptually is that the employer will be treated as making a regular match or profit-sharing contribution to the pre-tax side and the employee will be treated as though they immediately converted it to Roth. This means the employer still gets the expense deduction, and the employee will pick up that amount as ordinary income, but neither the employer nor the employee will have to pick that up as either FICA taxes or self-employment taxes. We don’t yet know exactly how this will be reported, but it’s treated as though it went into the pre-tax side and then was immediately converted into Roth.

Also, effective 2025, if your wages in the prior year (e.g., 2024) are over $145,000, you will not be allowed to make a catch-up contribution to the pre-tax side of your 401(k), 403(b), or 457(b). You’ll still be able to make catch-up contributions, but you’ll have to put them into the Roth side, assuming your employer offers a Roth plan. This means you may see a higher tax bill than you’re used to if you have been making pre-tax catch-up contributions. Again, this would apply if you had more than $145,000 in wages in the prior year. Can you avoid this? One way is to have less than $145,000 of wages. Another way is to potentially split wages over multiple employers – if you have that flexibility. The law reads “the plan”, not “a plan.” Also, the law specifies “wages.” Wages are not self-employment income. So, it appears that partners, highly compensated partners, or highly compensated sole proprietors would not be subject to this catch-up contribution requirement.

Putting this all together, one concern some of may have when it comes to Roth accounts is that while Roth’s are tax-free now could there be future changes to the rules? Might the government suddenly renege on its promise and make these taxable? No one can say with certainty what will or won’t happen in the future, but this is not something I worry about. These changes being put in place, such as no RMDs for Roth plan assets, the introduction of Roth SEP and Roth SIMPLE plans, Roth matching and profit sharing and the forced ROTH-ification of catch-up contributions for high earners, all of those go to bolster my belief further that we don’t have to worry about Congress changing its mind about the Roth accounts; Congress loves the Roth.

They’re not making it harder. They’re making it better, so more people consider using them. 

You may recall that as part of the Tax Cut and Jobs Act – the bill that Republicans passed when President Trump was in office – would have forced Roth-ification for everything. They got rid of it at the end because people didn’t like it very much. But now Congress is starting to go further down that road. They’ve dipped their toe in, they’ve said catch-up contributions for high earners will be subject to this, and the other changes we noted.

People who are making less are probably already using the Roth because, why not? If their rate is low enough, why not use the Roth already? Congress loves the Roth because it brings in dollars today. It looks great on the federal budget numbers. What else can you name that looks as good on the federal budget? These changes brings in revenue right now, they also increase tax revenue, and people like it. That’s why I think Roths will probably be sticking around. We may see more Roth-ification in the future.

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