Key Reforms Under SECURE Act 2.0

1. Roth Contributions to SIMPLE IRAs (Section 601)

• SIMPLE IRAs can now accept Roth contributions.
• Employers can offer employees the option to treat both employee and employer SEP contributions as Roth.
• Employees can choose to make full or partial contributions treated as Roth.

2. Roth Designations for Employer Contributions (Section 604)

• Defined contribution plans, such as 401Ks, can now allow employees to designate employer matching and non-elective contributions as Roth 401K contributions.

3. Elimination of RMDs from Roth 401Ks (Section 325)

• Required minimum distributions (RMDs) from Roth 401Ks have been eliminated.
• This change allows individuals to maximize the benefits of the Roth 401K without taking RMDs.
• Previously, retirees had to convert Roth 401Ks to Roth IRAs to avoid RMDs. This step is now unnecessary, though a Roth IRA transfer might still be beneficial if the 401K has limited investment choices. This should be weighed against the higher investment fees that may be charged for the management of a Roth IRA.

4. Restrictions on Catch-Up Contributions (Section 603)

• Effective after December 31, 2025, individuals earning more than $145,000 in the previous calendar year must make all catch-up contributions as Roth after-tax contributions.

Tax Considerations for Roth 401K vs. Pre-Tax 401K

Choosing between directing employer matches to a Roth 401K versus a pre-tax account depends on several factors, including:

• Current and future tax brackets
• Risk tolerance
• Cash flow situation

Unlike pre-tax 401Ks, Roth 401K contributions are taxed upfront. However, the key benefit lies in tax-free growth over time. A longer investment horizon and higher risk tolerance can increase the advantages of contributing to a Roth 401K.

To qualify for tax-free withdrawals, the individual must be at least 59 ½ years old, and the distribution must occur at least five years after the initial Roth IRA/401K contribution.

The choice of contributions must be explored holistically for each individual and family to determine the optimal mix of pre-tax to Roth 401K. At i2 Wealth Cross Border Planning, we specialize in helping clients make these critical decisions with the help of cash flow projections and deep understanding of the client’s financial situation and goals.

Cross-Border Tax Perspective: US to Canada

US residents planning to move to Canada have a unique advantage in opting for Roth 401K contributions:

They are moving to a higher-tax jurisdiction, thus having funds in a Roth account secures a tax-free status upon moving to Canada assuming the following steps are taken and conditions are met:

• • • • A one-time election is filed with the CRA in the first year of establishing or resuming Canadian tax residency.
      • Avoid making any subsequent contributions to the plan after becoming a Canadian tax resident.

Strategic Considerations for Cross-Border Financial Planning

Beyond employer match allocations, US residents planning to move or return to Canada should evaluate whether to convert existing pre-tax 401K accounts to Roth IRAs or Roth 401Ks. Converting from a pre-tax 401K to a Roth IRA is typically disallowed while being an active member, but funds within the plan can be converted from the pre-tax portion to the Roth.

This conversion is a taxable event and requires careful planning, considering liquidity for taxes, current tax rates on conversion versus Canadian future taxes on withdrawals, time horizon, risk tolerance, and more.

i2 Wealth Cross Border Planning specializes in comprehensive tax and retirement analyses, supported by detailed cash flow projections for both the US and Canada. By integrating a personal understanding of your financial situation and goals, i2 Wealth provides the data you need to make informed decisions about your financial wellbeing.

Schedule your consultation with us to explore your options for your qualified defined contribution plan. At i2 Wealth Cross Border Planning, our cross-border financial planners are here to help you navigate the complexities of international financial strategies.