PLANSPONSOR - May - June 2023 - 12

UPFRONT
Roths, on Closer Inspection
A
s Congress increased the " Rothification "
of retirement investing with
the SECURE [Setting Every Community
Up for Retirement Enhancement] 2.0 Act
of 2022, many plan participants and plan
sponsors have begun to consider a strategy
called the backdoor Roth conversion.
Also known as
a mega backdoor
Roth, the strategy is particularly advantageous
to high-income earners-this year,
those earning at least $153,000 as a single
taxpayer or $228,000 as a married-filingjointly
taxpayer-who would typically be
ineligible to contribute to a Roth account
directly,
says Fidelity Investments. The
conversion lets them transfer money from
their 401(k) or other qualified employer
retirement account into a Roth individual
retirement account and/or Roth 401(k).
Additionally, if an employee makes
only pre-tax contributions,
the most he
may save this year in a retirement plan
is $22,500-$30,000 if he is 50 or older.
But with after-tax contributions, he may
contribute up to $66,000-$73,000 if 50
or older. Any amounts contributed by an
employer count toward that limit.
" The appeal with converting is to build
more assets that are completely incometax-free
upon withdrawal and are tax-free
to the heirs upon withdrawal, " says Kelli
Send, senior vice president of participant
services at Francis Investment Council.
Participants who makes the conversion
must, of course, pay income tax on
the contributions for that tax year and on
untaxed earnings derived from the money.
Route to the Backdoor
According to Deba Sahoo, senior vice president
and product area leader at Fidelity,
plan sponsors must have a few other
features in place before they can even
think about offering a backdoor option.
Besides offering Roth accounts, Sahoo
says, plan sponsors must permit after-tax
contributions to their plan, for the backdoor
option to be possible. Additionally,
12 PLANSPONSOR.COM May - June 2023 Art by Klaas Verplancke
Sahoo says, the plan would need to allow
for in-service withdrawals or rollovers, to
enable rolling funds into a Roth IRA.
Send says, as of 2024, all plan sponsors
will be required to offer a Roth option
to their employees, due to a provision in
SECURE 2.0. The legislation mandates
that catch-up contributions to an employer
retirement plan be designated as after-tax
Roth contributions.
Congress has leaned into Roth
features because they mean participants
pay income taxes when they earn their pay,
vs. on a deferred basis, Send suggests.
When plan sponsors are first hiring
a recordkeeper or moving to a new one,
Sahoo says,
it
is
important
that
they
discuss the backdoor Roth during conversations.
He also notes that sponsors need
to make sure they satisfy all compliance,
auditing and administrative requirements
involved in setting up the option,
as well as ensure that they educate their
employees about how it works.
http://www.PLANSPONSOR.COM
PLANSPONSOR - May - June 2023

Table of Contents for the Digital Edition of PLANSPONSOR - May - June 2023
