The SECURE Act 2.0 of 2022 delivered sweeping changes that effect retirement planning rules and benefits. The Act was passed in a continued effort to both encourage and help Americans save for retirement. We recently published an article outlining the highlights of the SECURE Act, but this article focuses on the legislation for Roth SEP IRAs and SIMPLE IRAs.
Section 601 of the Act allows SEP IRAs and SIMPLE IRAs to accept Roth treatment of contributions for conventional and self-directed accounts.
Roth SEP IRAs and SIMPLE IRAs: Post Tax Contributions
The simplified employee pension (SEP) plan, commonly called a SEP IRA, is an employer-sponsored retirement plan like a 401(k) but is less costly and not as complicated to manage. Before the SECURE Act 2.0 passed, SEP IRAs (that weren’t part of previously grandfathered salary reduction simplified employee pension plans) only allowed employers to make non-Roth contributions to their employees’ plans.
Additionally, before the Act passed, any retirement plan that allowed employees to make pre-tax contributions also allowed a Roth contribution option—except the savings incentive match plan for employees (SIMPLE IRA). SIMPLE IRAs allow employees make pre-tax deferrals to the plan and their employer makes matching contributions (up to a certain percentage of the employees’ compensation).
With the passage of the Act and beginning with tax years after December 31, 2022:
- SIMPLE IRAs now have Roth options for contributions
- SEP IRAs allow Roth treatment of both employer and employee contributions
This is exciting news for retirement savers. Roth options allow contributions with taxed dollars, which means distributions of those contributions in retirement are tax free.
How Soon Can You Make Post-Tax Contributions to SEP and SIMPLE IRAs?
The Act states that these post-tax contributions to SEP IRAs and SIMPLE IRAs can begin this year. However, many tax professionals and financial advisors report that final IRS guidance on these accounts is unclear. Additionally, custodians and employers need time to include Roth language in their agreements and client benefits packages. Depending on your financial situation, you may also want to discuss pre-tax versus post-tax contributions—and which method best suits you.
Additional resources on SEP and SIMPLE IRAs: