By Dr. James M. Dahle, WCI Founder
The Roth IRA, named for Sen. William Roth, was created as part of the Taxpayer Relief Act of 1997. Since that time, more and more Roth accounts and ways to fund them have shown up. A Roth account, aka a tax-free retirement account, does not provide an upfront tax break like the classic “traditional” tax-deferred retirement accounts, but withdrawals of contributions and earnings from the account are generally 100% tax-free. But it is not always the right decision to use a Roth account instead of a tax-deferred account, especially for those without much savings who are still in their peak earnings years. The upfront tax deduction and arbitrage between their tax rate at contribution and at withdrawal can make a tax-deferred contribution a much better choice. However, when Roth is right for you, it's great to have more access to Roth accounts. The recently passed Secure Act 2.0 included a whole lot more Roth than we've ever had before.
Let's go over all of the available (and the soon-to-be-available) Roth accounts and the ways to fund them.
The classic Roth account known as the Roth IRA is an alternative to the traditional IRA, and it has been with us for over two decades. In 2023, one can contribute $6,500 to it ($7,500 if 50+.) While there are numerous exceptions prior to that time, all withdrawals after age 59 1/2 are tax and penalty-free.
Spousal Roth IRA
You can also fund a Roth IRA for your spouse—even if your spouse has no earned income—based on your income with the same contribution limits.
When you move money out of a tax-deferred/traditional IRA, 401(k), 403(b), 457(b), SEP IRA, SIMPLE 401(k), or SIMPLE IRA and into a tax-free/Roth IRA, this is called a Roth conversion. You will owe taxes at your ordinary income tax rates in the year of the conversion on any previously untaxed money converted.
Backdoor Roth IRA
High earners with a retirement plan at work cannot deduct traditional IRA contributions. High earners also cannot contribute directly to a Roth IRA. However, they can still contribute to a traditional IRA and then convert that money to a Roth IRA. This “Backdoor” (or indirect) Roth IRA contribution process has been widely used by white coat investors since it became legal in 2010. It can also be done for a spouse, i.e. a spousal Backdoor Roth IRA.
More information here:
Starting in 2006, employers were allowed to include a Roth subaccount as part of their 401(k)s. For its first 16 years, only the employee contribution (plus any catch-up contributions) could be Roth contributions. However, that changed with the Secure Act 2.0 (see details below). The employee contribution for 2023 is $22,500, and the catch-up for those 50+ is an additional $7,500. Roth 401(k)s, unlike Roth IRAs, have Required Minimum Distributions (RMDs). Thanks to the Secure Act 2.0, those RMDs for Roth 401(k)s go away starting in 2024.
Not to be outdone, government and nonprofit employers also were allowed to add a Roth contribution as part of their 403(b) accounts starting in 2006. Same contribution limits as a Roth 401(k) but with a slightly different catch-up contribution. Roth 403(b)s, unlike Roth IRAs, have RMDs. Thanks to the Secure Act 2.0, those go away starting in 2024.
Roth Thrift Savings Plan
Government workers and military members have long enjoyed the low-cost index funds in the Thrift Savings Plan (TSP), best thought of as the federal government's version of the 401(k). This option showed up in the TSP in 2012, two years after I separated. Given they are often eligible for a pension of some kind (as well as lots of tax breaks, like tax-free allowances and deployment pay for military members), most TSP participants should be using the Roth version of the plan.
Mega Backdoor Roth IRA
About 21% of 401(k)s allow participants to make pre-tax, Roth, and after-tax contributions. These after-tax contributions become “basis,” and they will not be taxed when they come out of the account. However, the earnings on those dollars will be completely taxable. After-tax contributions can be quite large, as high as $66,000 in 2023 ($73,500 for those 50+). Some plans also allow either in-plan Roth conversions of those after-tax contributions or in-service rollovers of those after-tax contributions to a Roth IRA. The process of making an after-tax contribution in conjunction with either an in-plan Roth conversion or an in-service rollover and conversion is known as the Mega Backdoor Roth IRA process. This nickname confuses many since it has almost nothing to do with an IRA at all and is completely separate from the Backdoor Roth IRA process. However, it probably isn't going to change so you might as well get used to it (and see if your plan allows it.) This process has been explicitly allowed since at least 2014, and it becomes more popular and available every year.
More information here:
Roth contributions in 457(b) accounts became legal in 2012. 457(b) accounts are deferred compensation, technically the employer's money. However, governmental 457(b)s are held in trust for the employee. Their $22,500  contribution limit is completely separate from the 401(k)/403(b) employee contribution limit, so many white coat investors treat their 457(b) as just another 401(k) or, in this case, just another Roth 401(k). 457(b)s also have their own special catch-up contributions (which even differ between governmental and non-governmental 457(b)s).
Roth SEP IRAs
Starting in 2023, investors can make Roth contributions to SEP IRAs, thanks to the Secure Act 2.0. Presumably, this will be a full $66,000 ($73,500 for those 50+) Roth contribution, although details are not yet clear. Presumably, SEP IRAs will also allow in-plan conversions. These features will eliminate one of the main reasons that white coat investors have been using solo 401(k)s instead of SEP IRAs, since Roth SEP IRAs will not count toward the pro-rata calculation that befuddles so many doing the Backdoor Roth IRA process. Presumably, these Roth SEP IRAs will not have RMDs either.
Roth SIMPLE IRAs and SIMPLE 401(k)s
Starting in 2023, investors can make Roth contributions to SIMPLE IRAs and SIMPLE 401(k)s, thanks to the Secure Act 2.0. Presumably, this will be a full $15,500 ($18,500 for those 50+ in 2023) contribution. Presumably, SIMPLE IRAs and SIMPLE 401(k)s will also allow in-plan conversions. These features will eliminate one of the reasons that white coat investors tend to avoid SIMPLE IRAs and SIMPLE 401(k)s, since Roth SIMPLE IRAs and Roth SIMPLE 401(k)s will not count toward the pro-rata calculation that befuddles so many doing the Backdoor Roth IRA process. Presumably, these Roth SIMPLE IRAs and SIMPLE 401(k)s will not have RMDs either.
Roth Matching Contributions
Starting with the passage of the Secure Act 2.0 at the end of 2022, employers will no longer have to use pre-tax dollars to match the contributions of 401(k) participants. They will have the option to make Roth matching contributions. Presumably, this will also apply to the entire contribution to solo 401(k)s and to profit-sharing contributions (including partner self-matches). This may even eliminate the need for anyone to bother with the Mega Backdoor Roth IRA process.
Mandatory Roth Catch-Up Contributions
Starting in 2024 as a result of the Secure Act 2.0, catch-up contributions for those with a Modified Adjusted Gross Income of $145,000+ (indexed to inflation) will have to be Roth. Tax-deferred catch-up contributions will no longer be allowed for these high earners.
Special Catch-Up Contributions for Those in Their Early 60s
Starting in 2025, those who are 60-63 get a special larger catch-up contribution to employer-provided retirement plans such as 401(k)s, 403(b)s, SEP IRAs, SIMPLE IRAs, SIMPLE 401(k)s, and, presumably, even 457(b)s. This catch-up contribution can be a Roth contribution (and starting in 2024, it must be for high earners.) This contribution is the larger of $10,000 or 50% more than the regular catch-up contributions ($7,500 in 2023 and indexed to inflation.)
529 to Roth Rollovers
529 money can now be rolled into the beneficiary's Roth IRA once the 529 has been established for 15 years. This rollover takes the place of a regular IRA/Roth IRA contribution, and the lifetime maximum is $35,000. This Secure Act 2.0 benefit starts in 2024.
Pension-Linked Emergency Savings Accounts
Starting in 2024, employers can establish a mandatory emergency fund for their non-highly compensated employees with up to 3% of compensation, and they can even match the contributions with Roth matching dollars 1:1 up to $2,500 per year. Once the account hits $2,500 of the employee's money, additional contributions will go into the Roth 401(k). Upon separation, this money can be taken penalty-free as cash, rolled into a Roth IRA, or rolled into the Roth 401(k).
Starting in 2024, employers without a retirement plan can start a “Starter 401(k)” with contribution limits equal to the IRA contribution and catch-up contribution limits. Presumably, these can be Roth contributions.
More information here:
Nanny Roth SEP IRAs
Starting in 2023, the employers of household employees like nannies can start a SEP IRA for them. Presumably, they will be able to make Roth contributions to the account.
Student Loan Payment Match
Starting in 2024, employers will be allowed to match student loan payments into their 401(k). These matching dollars can be Roth contributions.
Starting in 2027, the saver's credit for low earners saving for retirement will transition to the saver's match, where the federal government will match a contribution of up to $2,000 at 50% (total of $1,000). If that contribution was to a Roth 401(k), Roth 403(b), or Roth IRA, the matching dollars will also be Roth dollars.
Employee Solo 401(k) Contributions
Starting in 2023, solo (individual) 401(k)s established after the end of the calendar year can still receive employee contributions—including Roth contributions—and employer contributions (which can also now be Roth) as long as it's established before your tax return date.
As you can see, there are now tons of ways to get more Roth money into retirement accounts. If you have been afraid to use retirement accounts because your only options for more contributions were tax-deferred and you think you'll be withdrawing money at a higher tax rate than where you are now, you no longer need to worry about this. I don't know if the Senate Finance Committee (that drafted most of the Secure Act 2.0) just wants more tax money now or if they're really just true Roth believers, but a far larger percentage of retirement savings will surely be in Roth accounts going forward.
If you need extra help with planning for retirement or have
questions about the best way to save your money in tax-protected accounts, hire a WCI-vetted professional to help you figure it out.
What do you think? What new Roth accounts and contributions options do you expect to take advantage of? Comment below!