The Secure Act 2.0 has ushered in a groundbreaking development in retirement savings. From 2023 onwards, individuals are able to make Roth contributions to their Simple IRAs, a significant change from the previous limitation to only pre-tax contributions.
Understanding Roth Contributions in Simple IRAs
When employees express interest in allocating Roth contributions to their Simple IRAs, several considerations come into play:
- Simple IRA custodians might require additional time to revise client agreements to incorporate Roth options.
- Employers must decide whether to permit Roth contributions in their plans and inform their workforce about these new choices.
- Modifications in payroll processing will be necessary to accommodate the new Roth contribution deductions.
- Employees should seek guidance from financial advisors, accountants, or plan representatives to make informed decisions between Roth and Pre-tax Contributions for their Simple IRAs.
Roth Contributions: Will This Be Mandatory for Employers?
Ambiguity remains on whether offering Roth contributions in Simple IRA plans is mandatory for employers. Drawing parallels with the 401(k) system, it may turn out to be an optional decision for employers to include Roth contributions.
Each year, companies sponsoring Simple IRA plans distribute Form 5304-Simple to employees, detailing:
- Eligibility criteria
- Employer contributions
- Vesting policies
- Withdrawal and Rollover processes
The IRS is expected to revise the Form 5304-Simple, incorporating Roth provisions. This revision will likely introduce a section for employers to indicate their stance on Roth employee deferrals. However, at this point, it is still unknown as to how the IRS put this new rule into practice. Stay in touch with us for future updates.
Will Employees Need Separate Accounts for Simple IRA Roth Contributions?
There's a pertinent question about whether employees opting for Roth contributions in Simple IRAs need distinct accounts for these contributions.
In the 401(k) arena, plans track various contribution sources and earnings, allowing Pre-tax and Roth contributions in the same account. Simple IRAs are traditionally all pre-tax and could necessitate two separate accounts – one for Roth and another for Pre-tax balances, unless recordkeeping services are introduced to manage both contribution types in a single account.
Simple IRA Contribution Caps for 2024
The annual contribution limit for Simple IRAs in 2024 is the lesser of 100% of compensation or:
- $16,000 for those under 50
- $19,500 for those 50 and above
These limits are cumulative for both Pre-tax and Roth contributions, meaning an employee can't exceed these limits by making separate contributions in each category. Employees can, however, distribute their contributions between Pre-tax and Roth within these limits.
It should also be noted that the 2024 contribution limit for a Roth IRA is $7,000 if you are under age 50 and $8,000 if you are over 50.
Employer Roth Contribution Options in Secure Act 2.0
Secure Act 2.0 also permits companies to offer their employees the choice of receiving employer contributions in either Pre-tax or Roth format. However, this option is confined to "qualified retirement plans" such as 401(k), 403(b), and 457(b) plans. As Simple IRAs don't fall under this category, they are excluded from this Roth employer contribution feature.
Why Should Employers Consider Offering the Roth Option?
Given the complexities, why should companies consider offering this option? The answer lies in the competitive edge it provides in attracting and retaining talented employees. In today's challenging job market, unique benefits can be a decisive factor for potential employees.
The Secure Act 2.0 has introduced multiple changes to employer-sponsored retirement plans, set to roll out over the next few years. The introduction of Roth contributions to Simple IRA plans is just the beginning. Companies proactive in understanding and implementing these new options will likely gain a competitive advantage in the employment market.
Contact Us for Additional Details
We understand that this provision of the Secure Act 2.0 may be confusing, and you may have questions. Please contact our office for assistance.