Four important SECURE 2.0 Roth rules

What changed for Roth under SECURE 2.0? 

SECURE 2.0 updated the Roth rules to:

1 Allow tax-free rollovers from 529 accounts to Roth IRAs if certain requirements are met

2 Eliminate pre-death required minimum distributions (RMDs) for Roth amounts in retirement plan accounts

3 Require catch-up contributions be made on a Roth basis for participants whose prior-year FICA wages exceed the applicable Roth catch-up wage threshold

4 Allow employer matching or nonelective contributions to be designated as Roth contributions

All four provisions are now in effect. Let’s take a closer look at each one. 

1 Section 126—rollovers from 529 plans to Roth IRAs

The designated beneficiary of a 529 account that’s been maintained for at least 15 years can request a tax-free direct rollover of the account’s assets to a Roth IRA in their name. The rollover may not exceed the aggregate amount of the contributions made to the 529 account (and earnings attributable to those contributions) more than five years before the date of the distribution and is subject to a lifetime limit of $35,000. In addition, the rollover is subject to the annual Roth IRA contribution limit as well as the requirement that the designated beneficiary have includable compensation at least equal to the amount rolled over.

This provision gives 529 account beneficiaries more flexibility when they don’t need the money in their account to pay for qualified education expenses or to repay student loans. Previously, 529 account owners could only change the designated beneficiary for the account or withdraw the excess funds, which could result in taxes and penalties. Now, beneficiaries can transfer a portion of the money to a Roth IRA and use it to help build their retirement savings. 

2 Section 325—exemption of pre-death RMDs from Roth amounts in retirement plan accounts

This provision exempts Roth amounts in retirement plans from pre-death required minimum distributions (RMDs), aligning the rules with those for Roth IRAs. Participants are no longer required to take lifetime RMDs from Roth retirement plan accounts, allowing assets to remain invested longer. Previously, some participants would roll Roth plan assets to a Roth IRA to avoid the lifetime RMD requirements. 

3 Section 603—catch-up contributions must be made on a Roth basis

This mandatory provision requires that catch-up contributions under an employer retirement plan (other than a SIMPLE IRA or simplified employee pension (SEP) plan) be made on a Roth basis for participants whose prior year FICA wages from the employer sponsoring the plan exceed the Roth catch-up wage threshold ($150,000 for 2025, indexed for inflation). All other participants must be allowed—but aren’t required—to make catch-up contributions on a Roth basis. As a result, a plan that permits catch-up contributions but doesn't permit designated Roth contributions generally can't allow catch-up contributions for participants whose FICA wages exceed the threshold unless the plan is amended to add a Roth contribution feature.

Plan sponsors need to work closely with their payroll providers and recordkeepers to ensure that prior-year FICA wages are tracked and reported accurately, and that Roth catch-up contributions are processed correctly for affected participants. 

4 Section 604—treatment of employer matching or nonelective contributions as Roth contributions (optional provision)

Under this optional provision, plan sponsors of 401(k), 403(b), and governmental 457(b) plans can offer participants the ability to designate employer matching or nonelective contributions as Roth contributions. Student loan matching contributions can also be designated as Roth. Any matching and nonelective contributions designated as Roth are included in the employee’s taxable income in the year contributed; however, any future earnings on these contributions aren’t taxable if the requirements for a qualified Roth distribution are satisfied.¹ Employer contributions must be 100% (fully) vested before they can be designated as Roth contributions.

Some plans currently offer an in-plan Roth conversion feature, whereby participants may convert employer contributions to Roth after they have been made to the plan through separate employee-initiated elections. This optional provision helps streamline the process, allowing the Roth election to take effect at the time the contributions are made, instead of requiring a separate in-plan Roth conversion election later.

From a practical standpoint, it may take time for plan sponsors and service providers to offer this feature. Plans that have a vesting schedule (especially a graded schedule) need to consider how and when to offer this election to participants and whether changes to the plan’s vesting schedule would facilitate its use. Additionally, sponsors need to think about how they’ll communicate the availability of this election to their employees and provide information on its tax implications. Payroll and service providers have to establish administrative processes for collecting and processing participant elections and reporting any employee-elected Roth matching or nonelective contributions as taxable income.

Impact of SECURE 2.0 Roth provisions

The 529-to-Roth IRA rollovers and the elimination of pre-death RMDs from Roth plan accounts provide additional flexibility and savings opportunities for participants. The Roth-related changes under Sections 603 and 604 also create important payroll, operational, and administrative considerations for plan sponsors. While sponsors must implement the mandatory Roth catch-up contribution requirements under Section 603, these considerations may affect whether they choose to adopt the optional Roth treatment of employer matching and nonelective contributions under Section 604. As always, plan sponsors should consult with their financial, tax, and legal advisors to determine what's best for their plans.

FAQs

What’s the lifetime limit for a 529 to Roth IRA rollover?

The lifetime rollover limit from a 529 plan to a Roth IRA is $35,000 per beneficiary. It’s a cap that you reach gradually, as each rollover is subject to annual Roth IRA contribution limits and certain eligibility rules. To qualify, the beneficiary must also have earned income at least equal to the amount being rolled over for that year.

Are employer Roth matching contributions taxable to the employee?

Yes, employer Roth matching contributions are taxable as income in the year they’re made. The same tax treatment generally applies to Roth profit-sharing (nonelective) contributions. Unlike traditional employer matches, these contributions are included in the employee’s gross income but can grow tax free thereafter if the qualified Roth distribution rules are met. 

Are employer contributions required to be 100% vested to be treated as Roth contributions?

Yes, employer contributions must be 100% (fully) vested before they can be designated as Roth contributions. Plans can still apply vesting schedules on employer matching and nonelective contributions, but only contributions that are fully vested when made can be treated as Roth contributions.