The SECURE 2.0 Act announced a delay in some of the provisions initially issued. Specifically one of the most widely discussed areas – catch-up contributions in retirement plans. As a refresher the IRS originally intended all employer sponsored plans to designate their catch-up contributions on a ROTH basis if the participant earned over $145,000. As of right now there is two-year transition period and much needed breathing room for many employers and plan sponsors to conform. Since there will be a delay to how catch-up contributions may be characterized in the future, we would like to take use this as an opportunity to discuss a popular topic.

In short, everyone should make a decision that is conducive to their tax filing situation. If you happen to work with a tax professional, this can be a great question to discuss leading up to filing your tax return. The old adage that Roth accounts are only considered a good investment for young individuals in a low tax bracket is not always the case. Tax brackets in retirement can be unpredictable as many households can still be in a similar tax bracket in their retirement days. By contributing some retirement funds to after-tax savings vehicles such as a Roth IRA, or Roth 401(k) or 403(b) it provides more flexibility when withdrawals are made. Qualified withdrawals from a Roth IRA are tax free as long as certain conditions are met such as attaining age 59.5 and older.

More and more employers are offering Roth benefits and if you are unable to participate to a Roth IRA due to income restrictions, taking advantage of your employer options can create more tax-free income in retirement. David Brown, an associate professor of finance at the University of Arizona, proposes a simple rule that’s worth considering. His general formula for people of all income levels says to add 20 to your age, put that percentage toward your traditional retirement account, and the rest as a Roth contribution. For example, a 40-year-old may consider contributing 60% to a traditional retirement account and 40% to a Roth. The exact split matters less than socking away some post-tax money, Brown says: “If you’re 100% traditional, please start doing Roth.”


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