Secure Act 2.0: Roth Simple IRA Contributions Beginning in 2023
With the passage of the Secure Act 2.0, for the first time ever, starting in 2023, taxpayers will be allowed to make ROTH contributions to Simple IRAs. Prior to 2023, only pre-tax contributions were allowed to be made to Simple IRA plans.
Roth Simple IRAs
So what happens when an employee walks in on January 3, 2023, and asks to start making Roth contributions to their Simple IRA? While the Secure Act 2.0 allows it, the actual ability to make Roth contributions to Simple IRAs may take more time for the following reasons:
The custodians that provide Simple IRA accounts to employees may need more time to create updated client agreements to include Roth language
Employers may need to decide if they want to allow Roth contributions to their plans and educate their employees on the new options
Employers will need to communicate to their payroll providers that there will be a new deduction source in payroll for these Roth contributions
Employees may need time to consult with their financial advisor, accountant, or plan representative to determine whether they should be making Roth or Pre-tax Contributions to their Simple IRA.
Mandatory or Optional?
Now that the law has passed, if a company sponsors a Simple IRA plan, are they required to offer the Roth contribution option to their employees? It’s not clear. If the Simple IRA Roth option follows the same path as its 401(k) counterpart, then it would be a voluntary election made by the employer to either allow or not allow Roth contributions to the plan.
For companies that sponsor Simple IRA plans, each year, the company is required to distribute Form 5304-Simple to the employees. This form provides employees with information on the following:
Eligibility requirements
Employer contributions
Vesting
Withdrawals and Rollovers
The IRS will most likely have to create an updated Form 5304-Simple for 2023, which includes the new Roth language. If the Roth election is voluntary, then the 5304-Simple form would most likely include a new section where the company that sponsors the plan would select “yes” or “no” to Roth employee deferrals. We will update this article once the answer is known.
Separate Simple IRA Roth Accounts?
Another big question that we have is whether or not employees that elect the Roth Simple IRA contributions will need to set up a separate account to receive them.
In the 401(k) world, plans have recordkeepers that track the various sources of contributions and the investment earnings associated with each source so the Pre-Tax and Roth contributions can be made to the same account. In the past, Simple IRAs have not required recordkeepers because the Simple IRA account consists of all pre-tax dollars.
Going forward, employees that elect to begin making Roth contributions to their Simple IRA, they may have to set up two separate accounts, one for their Roth balance and the other for their Pre-tax balance. Otherwise, the plans would need some form of recordkeeping services to keep track of the two separate sources of money within an employee’s Simple IRA account.
Simple IRA Contribution Limits
For 2023, the annual contribution limit for employee deferrals to a Simple IRA is the LESSER of:
100% of compensation; or
Under Age 50: $15,500
Age 50+: $19,000
These dollar limits are aggregate for all Pre-tax and Roth deferrals; in other words, you can’t contribute $15,500 in pre-tax deferrals and then an additional $15,500 in Roth deferrals. Similar to 401(k) plans, employees will most likely be able to contribute any combination of Pre-Tax and Roth deferrals up to the annual limit. For example, an employee under age 50 may be able to contribute $10,000 in pre-tax deferrals and $5,500 in Roth deferral to reach the $15,500 limit.
Employer Roth Contribution Option
The Secure Act 2.0 also included a provision that allows companies to give their employees the option to receive their EMPLOYER contributions in either Pre-tax or Roth dollars. However, this Roth employer contribution option is only available in “qualified retirement plans” such as 401(k), 403(b), and 457(b) plans. Since a Simple IRA is not a qualified plan, this Roth employer contribution option is not available.
Employee Attraction and Retention
After reading all of this, your first thought might be, what a mess, why would a company voluntarily offer this if it’s such a headache? The answer: employee attraction and retention. Most companies have the same problem right now, finding and retaining high-quality employees. If you can offer a benefit to your employees that your competitors do not, it could mean the difference between a new employee accepting or rejecting your offer.
The Secure Act 2.0 introduced a long list of new features and changes to employer-sponsored retirement plans. These changes are being implemented in phases over the next few years, with some other big changes starting in 2024. The introduction of Roth to Simple IRA plans just happens to be the first of many. Companies that take the time to understand these new options and evaluate whether or not they would add value to their employee benefits package will have a competitive advantage when it comes to attracting and retaining employees.
Other Secure Act 2.0 Articles:
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
