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CPA Solutions Safe 2.0 Questions on Roth Contributions, RMDs, 529 Rollovers


Over the previous two weeks, Jeff Levine, Kitces.com’s lead monetary planning nerd and Buckingham Wealth Companions’ chief planning officer, has been laborious at work spreading the phrase concerning the Setting Each Group Up for Retirement Enhancement (Safe) 2.0 Act.

Talking on a Kitces.com webinar early within the new yr, Levine stated the Safe 2.0 laws has firmly cemented the function of Roth-style accounts within the retirement planning effort. Levine stated it’s obvious that the present members of Congress “simply love the Roth, and for good cause.”

Professional-Roth insurance policies look good on the federal funds in the present day, he defined, and other people in most people truly perceive and respect Roth accounts. There are few different coverage points for which this dual-sided assist is true, and Levine stated that reality may give planning professionals a number of confidence that the Roth is right here to remain.

Levine shared some further insights throughout a webinar hosted by the tax planning software program supplier Holistiplan, throughout which he fielded a protracted checklist of tax-focused questions from listeners. As summarized within the Q&A dialog beneath, a big variety of the greater than 100 retirement-focused provisions within the Safe 2.0 bundle may have tax planning implications.

Whereas some results of the Safe 2.0 bundle gained’t be felt till 2024 or later, elements of the regulation are already in impact, Levine warned, and so it’s beholden on advisory professionals to stand up to hurry as shortly as potential.

AUDIENCE QUESTION: I perceive that the Safe 2.0 regulation permits employers to direct their matching retirement plan contribution into Roth-style accounts. Will these contributions be topic to FICA taxes for the recipient?

JEFF LEVINE: The straightforward reply is not any, these contributions gained’t be topic to regular employment taxes, however the quantity of the contributions might be included within the particular person’s gross earnings for the yr.

Efficient instantly upon enactment, Safe 2.0 permits certified plans to permit workers to designate that their employer’s matching or non-elective contributions be directed to a Roth account.

So, in case you have a situation the place somebody will get a $5,000 matching contribution they usually elect that it goes into the Roth account, the tip taxation end result might be just like what would occur if that they had accepted the match into the normal pretax account after which later in the identical yr transformed it to their Roth IRA. The quantity of the contribution might be added to their gross earnings, but it surely gained’t be topic to FICA employment taxes.

Does the 529 plan to Roth IRA rollover lifetime restrict of $35,000 apply per account or per beneficiary?

That’s a superb query, as it’s not fully clear from the textual content of the laws.

On my studying, it seems to be a rule that can apply per beneficiary. So, it appears possible that you would change the beneficiary and technically do a number of rollovers out of the 529 plan that may quantity to higher than $35,000. Once more, this isn’t fully clear at this juncture, so we must wait and see what sort of steerage is likely to be issued.

Listeners ought to take notice that, no matter rollover quantity is being thought of, the 529 account has to have existed for 15 years so as to qualify. Given this 15-year requirement, it’s best to in all probability go forward and encourage your purchasers to simply open a 529 plan in the present day and put $50 or $100 in. That method they will simply get that clock began, even when they’ve to call themselves because the preliminary beneficiary.

Are you able to expound on the rule that can apply in 2024 with respect to catch-up contributions going into Roth accounts for these with greater than $145,000 in wages?

Mainly, these catch-up contributions should go to Roth 401(okay)s if wages from their firm exceed $145,000 for the earlier yr, and this takes impact in 2024.

Whereas the efficient date is technically 2024, this ‘earlier yr’ function does imply that those that earn greater than this quantity in 2023 might be topic to the brand new Roth requirement subsequent yr.

In 2023, individuals age 50 and older can contribute an additional $7,500 per yr yearly into their 401(okay) account. This quantity will improve to $10,000 per yr and might be listed for inflation beginning in 2025 for individuals age 60 to 63.

What’s the newest data on required minimal distributions for non-spouse beneficiaries who inherit a person retirement account? What new data ought to we perceive concerning the 10-year drawdown window?

Sadly, this matter was not clarified as a part of Safe 2.0 as some had hoped it will be. So, there’s nonetheless some important uncertainty concerning inherited IRAs as we await full IRS rules, probably later this yr.

At this level the predominant steerage we are able to depend on is the IRS Discover 2022-53.

That discover emphasised that the IRS gained’t impose RMDs for these inherited accounts in 2021 and 2022, but it surely didn’t say with certainty what would occur for 2023. It simply stated the ultimate rules, which we don’t have but, will apply on the earliest in 2023.

Finally, we’re nonetheless in a wait-and-see second, however I can let you know for certain that for 2021 and 2022, no RMDs are required for these beneficiaries. Nonetheless, simply because these distributions aren’t required doesn’t mechanically imply will probably be higher, on a tax foundation, for each taxpayer to keep away from these distributions. All of it depends upon their particular circumstances and earnings wants.

Do you’re feeling Roth distributions could also be topic to taxation at a while sooner or later? Might the favorable therapy of Roth accounts be eradicated sooner or later if Congress wants extra tax {dollars}?

That’s a superb query, and I perceive why you’ll ask it, however my intestine sense is that they won’t take motion to tax Roth distributions sooner or later.

To start with, I believe you’ll see main authorized and legislative challenges to such an motion. And even when such a change have been made, when Congress adjustments retirement guidelines, they virtually all the time grandfather individuals into the outdated algorithm. So, any Roth contributions made in the present day will very possible get their favorable tax therapy grandfathered in if any adjustments have been to be made in future years.

However once more, I don’t assume that’s more likely to occur anyway. Give it some thought. In the event that they ever made a change like this and it was structured as a potential change solely, that may be actually counterproductive. Folks would simply cease making Roth conversions.

There could be no important profit for contributing to a Roth account if Congress did one thing like that, and so the contributions would cease, and that may defeat the entire objective of the change within the first place. So, I don’t see it occurring.

Concerning the 529 plan to Roth conversions, are there restrictions on who might be named because the beneficiary?

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