The Secure Act 2.0 was enacted in December 2022 to strengthen the retirement system and better prepare Americans for retirement. While the law, which stands for “Setting Every Community Up for Retirement Enhancement,” contains dozens of provisions, there are a few that merit special attention, specifically as they apply to Roth IRAs and other after-tax accounts.

In this article, we discuss those provisions and illustrate how individuals might benefit from them.

First, a quick reminder: A Roth account does not incur taxes upon distribution of funds, although no immediate deduction is offered. In contrast, a traditional IRA provides a tax deduction up front, but you must pay taxes when you withdraw the funds. Since their introduction in 1997, Roth IRAs have been widely recognized for their tax efficiency in growing and passing on wealth.

Here are some of the changes to Roth accounts contained in Secure 2.0.

Roth contributions expanded

• Roth contributions are now allowed in SIMPLE and SEP IRAs, which can benefit individuals who prefer to have tax-free withdrawals in retirement. With a Roth IRA, you pay taxes on contributions up front, but qualified withdrawals are tax-free. This can be advantageous for individuals who expect to be in a higher tax bracket in retirement than they are currently.

• Employer contributions can now be made in Roth to retirement accounts like 401(k)s, 403(b)s, and SIMPLEs. This can be beneficial for individuals who want to diversify their retirement savings and have tax-free withdrawals in retirement.

• Catch-up contributions (additional amounts for individuals over 50) are required to be in Roth for individuals with wages exceeding $145,000. This can be helpful for those who want to maximize their tax-free retirement savings.

• No required minimum distributions (RMDs) for Roth balances in 401(k)s and 403(b)s. This can benefit individuals who want to leave their Roth balances untouched and grow tax-free for as long as possible. This is particularly advantageous for those who don't need the money in their Roth accounts to fund their retirement expenses and want to pass on a larger tax-free inheritance to their beneficiaries.

• The ability to transfer balances from 529 plans to Roth IRAs. This can help individuals who have saved more than they need for their children’s education and want to use the excess funds for retirement savings. However, there are significant limitations to this transfer, including a $35,000 limit and a requirement that the 529 plan be maintained for at least 15 years.

How can individuals benefit from these changes?

One primary benefit is the ability to pay taxes on Roth contributions now, while in a lower tax bracket, rather than waiting until retirement when the tax bracket may be higher. This can result in significant tax savings in the long run. It’s important to note that tax rates are currently lower than they will be in 2026, when they are set to “sunset” back to where they were before the Tax Cuts and Jobs Act of 2017. So taking advantage of the Roth changes now can help individuals save on taxes before rates increase.

Why did Congress do this?

While some may wonder why Congress would pass changes that could lower government revenue in the long term, it's important to note that Roth contributions pay taxes now, increasing revenue for the government in the short and intermediate term. This can benefit both individuals and the government by providing immediate revenue and long-term tax savings for Americans. Additionally, the Roth changes may encourage individuals to save more for retirement, ultimately reducing reliance on government programs in the future.

Do your homework before you make a move.

The real benefits of each change will depend on an individual’s specific financial situation and retirement goals, so it’s important to consult with a financial advisor before making any decisions about retirement accounts.

Hunter Yarbrough, CPA, CFP, is a vice president and financial adviser with CapWealth. He is passionate about taking a holistic view of personal finance, including investments, taxes, retirement, education, estate planning, and insurance. For more information about Hunter and CapWealth, visit capwealthgroup.com.

This article originally appeared on Nashville Tennessean: The new Secure Act expands Roth IRAs