Secure Act 2.0 Roth Rules

The “SECURE Act 2.0” legislation that passed the House a few weeks ago contains a provision that would require employers to offer Roth accounts in some situations. Under the law, all catch-up contributions made to retirement accounts (for taxpayers aged 50 or older) would have to be Roth contributions. Roth contributions, which are made with after-tax dollars, don’t offer employees a current year tax reduction, but do create a source of tax-free revenue in the future. The law would also allow SIMPLE IRAs to accept Roth contributions and would similarly allow employees to treat both employer and employee contributions to SEP-IRAs as Roth contributions.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about the “Rothification” of catch-up contributions under SECURE Act 2.0.

Below is a summary of the debate that ensued between the two professors.

Their votes:

Bloink

Byrnes

Their reasons:

Bloink: Many taxpayers currently don't have access to a Roth savings option. Because of that, many employees don't even understand the benefits of diversifying their retirement savings and instead focus solely on the up-front tax break offered by traditional retirement accounts. This new rule would push more taxpayers to diversify and create a tax-free stream of income during retirement, even if it’s a smaller pool of funds for most clients who only contribute the catch-up to the Roth account.

Byrnes: Many employers don't offer a Roth option because the issue is just too complex for employers to be responsible for managing. For most employees, a pre-tax contribution is the most beneficial option--and many don't even max out their pre-tax contributions. This makes offering a retirement plan even more complicated and burdensome for smaller businesses that may be reluctant to add to their administrative burden.



Bloink: This new plan would have a twofold benefit: first, it would offer the current revenue needed to offset some of the other important and beneficial provisions in the legislation. Second, it would require employers to offer a Roth option in order to allow their employees' access to the catch-up benefit. That would greatly expand the ability of employees to contribute to a Roth.

Byrnes: The new Rothification proposal significantly limits employee choice and control over how their limited retirement savings should be allocated. Employees have the option of establishing a Roth IRA outside of the work-sponsored retirement plan. They should also be able to choose where their catch-up contributions land.



Bloink: Mandatory Roths are similar to the auto-enrollment features that we’ve found to be so beneficial. Using the Roth for catch-up contributions pulls a small portion of an employees’ overall retirement savings into the Roth, so that they have to learn about the feature and its benefits going forward.

Byrnes: This provision is designed solely to raise additional revenue and get this bill passed, but if included, it will backfire in terms of the added complexities. Instead of motivating employers to offer a new savings option and education employees about the benefits, it could instead make offering any type of retirement savings plan less attractive. Employees who are making the catch-up contribution are older, more seasoned workers. They’re those who are more likely to have professional financial advice and knowledge about retirement savings options, and they should have control over their own retirement savings.