The government seems to have a plan to boost Roth IRA, and taxpayers can definitely take advantage of this. If you have an existing 401K plan, whether through an employer or through your own company plan, it's worth finding out if it offers a Roth option. Before the passage of the new laws, the Roth portion of that 401K was subject to required minimum distributions (RMDs) once the employee turned 72. With the new law, plans with a Roth designation no longer have an RMD, meaning that money can stay in the account and continue to grow.

If you participate in a 401K plan without a Roth option, there is still some good news on the RMD front. The RMD requirement age increases from 72 to age 73 in 2023, and then goes up to age 75 in 2033. The longer you can postpone having to take RMDs means your money can stay in the account and have more time to grow. In addition, previously there was a 50% penalty on the RMD amount if not taken. That penalty has been reduced down to 25%. That penalty can be reduced even more if the RMD is taken within a "timely manner."

If your S-Corp has a solo 401K, you can do a 25% match of your wages into your plan. The fully vested matching portion is now eligible to be designated as a Roth contribution. For example, you could contribute $22,500, as an employee, into a traditional 401K. As the employer, you can then match it at 25% and designate that portion as a Roth contribution. 

SECURE 2.0 now expands Simplified Employee Pension (SEP) IRAs and Simple IRAs to allow for Roth contributions. Prior to SECURE 2.0, these types of retirement plans could only include pre-tax dollars and tax is deferred until the money is withdrawn. Being able to designate those contributions as Roth contributions does mean the contributions are taxed going in. However, it can mean significant tax savings because, as tax rates undoubtedly get higher in the future, those contributions will grow tax-free for as long as they remain in the account and withdrawals are tax-free in retirement. 

If you are in the market to set up a new retirement plan for your business, given all the new tax credits available, it's worth considering a 401K plan. 

Plan Setup Costs

One important tax credit gives you a dollar-for-dollar tax credit up to the first $5,000 in plan administrative setup costs that you spend in order to start a plan if there are less than 50 employees. For example, if you spent $3,000 to set up a plan for your 25 employees, 100% of that money spent would be a tax credit on your tax return. This tax credit remains at 50% if there are 50 employees or more. 

Employer Match

Another tax credit to take advantage of with starting a new retirement plan is the employer match credit. There is a 100% tax credit, up to $1,000 per employee, for employer contributions made for employees earning less than $100,000. 

For example, you have four employees earning $85,000 per year. You make matching contributions to them as an employer in the first year of the plan. In that first year of the plan, in addition to the administrative setup cost credit, you would also get a tax credit of $1,000 per employee or $4,000 total tax credit. 

Solo 401K

If you want to start a Solo 401K and you're a Schedule C single member LLC or sole proprietor, now is a great time to take action because there is a lot of flexibility being built into the Solo 401K. We are generally bigger fans of solo 401Ks over SEP IRAs because of the flexibility, the growth, and some of the self-directing options available down the line. One benefit of the Solo 401K is that you can set it up later for the both the employee and  employer side, plus it doesn't have to be funded right away. For 2022, you still have until April 15, 2023, to set up a Solo 401K. If it makes more sense to set up your plan for 2023, you could actually wait until April of 2024 to set it up and fund it. 

Required Minimum Distributions (RMDs)

For anyone that is already at retirement age, getting close to retirement age, or has parents, other relatives, or friends getting close to retirement age, this one is for you. If you are turning 72 years old after December 31, 2022, your RMD can be delayed until your 73rd birthday. 

If you are in your early 60s, and you will be turning 74 after December 31, 2032, or 10 years from now, RMD age will be put off until age 75. So, for anyone younger than 60 can now consider 75 years old as the age at which you will have to take RMDs. So the earlier you can contribute, the more time there is for that money to grow. 

In addition, for those who qualify to make a catch-up contribution, individuals age 50 and older, should also consider contributing an extra $6,500 every year on top of your employee contribution. Under SECURE 2.0, beginning after December 31, 2024, the "Age 60-63 Catch-Up Limit" will allow a maximum catch-up contribution up to $10,000, but ONLY for people who turn 60, 61, 62, or 63 years old during the year. Still, this is a great opportunity for anyone who is currently between the ages of 58 and 61 years old.

Your child is all grown up and has graduated college. That's a huge accomplishment, but what do you do if your child did not use all of the money that was contributed to the 529 Plan account you set up for them when they were 3 years old? The details are sparse right now but under SECURE 2.0, in certain cases, you will be able to do a 529 Education Plan rollover to a Roth IRA. 

The new rule says that if you have a 529 Plan that has been in existence for at least 15 years, starting in 2024, you can rollover up to $35,000 from that plan into a Roth IRA which would then have 100% tax-free growth forever. This type of rollover is also not subject to standard Roth income limits. However, there are a few limits to this including that the rollover cannot be more than the Roth contribution limit established ($6,500 for 2023) and contributions or earnings from the past 5 years cannot be rolled over. 

The focus of SECURE 2.0 is on increasing opportunities for individuals to save for retirement. The laws are new and though clarification may still be needed on certain items, if you have any questions on how these new laws can benefit you, please reach out to our team in Soraban.