The SECURE 2.0 Act has substantially changed retirement account rules. Some of these changes have already taken effect and caused confusion. That has been problematic for some older adults who need clarity on crucial retirement planning aspects, like taking required minimum distributions (RMDs).
Another concern involved upcoming changes to catch-up contributions rules for 401(k) plans. These changes will eventually require catch-up contributions for higher-income earners to be made on a Roth basis.
Making catch-up contributions on an after-tax Roth basis means paying taxes on your retirement savings during the years when you usually earn more.
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On the other hand, traditional 401(k) accounts allow you to defer taxes until retirement, which can be advantageous if you anticipate being in a lower tax bracket by then.
Related: SECURE 2.0 Act Changes Retirement Plan Rules
401(k) catch-up contribution changes
- Under SECURE 2.0, if you are at least 50 years old and earned $145,000 or more in the previous year, you can make catch-up contributions to your employer-sponsored 401(k) account.
- But there’s a catch. You would have to make those extra contributions on a Roth basis, using after-tax money.
- You wouldn’t be able to get tax deductions on those catch-up contributions as you would with typical 401(k) contributions, but you could withdraw the money tax-free when you retire.
- The SECURE 2.0 Roth catch-up contribution rule won’t apply to taxpayers making $144,999 or less in a tax year.
What’s the problem? Essentially, when lawmakers drafted the Roth catch-up contribution provisions of SECURE 2.0, certain language was inadvertently left out of the law. As a result, according to the current text of SECURE 2.0, no participant would be able to make catch-up contributions (whether on a pre-tax or Roth basis).
Congress is aware of this and other drafting errors in SECURE 2.0, and lawmakers will likely make technical corrections. However, the mistake complicated challenges with implementing the catch-up contribution change that, until recently, was supposed to be effective this year (2024).
Major companies advocated for 401(k) catch-up relief
Numerous employers, plan providers, and organizations requested more time to modify systems to allow catch-up 401(k) contributions to be made on an after-tax basis.
Over 200 entities made up of Fortune 500 companies, firms, and public employers, including the American Retirement Association, Chipotle Mexican Grill, Fidelity Investments, Charles Schwab, Microsoft Corporation, and Delta Airlines, asked for a two-year delay to the Roth catch-up rule to 2026.
In a letter to leaders of the U.S. House Ways and Means Committee, written by the American Benefits Council, the group argued that the required systems for enforcing the rule, which they say involves “coordinating payroll systems instantly,” did not exist as of last year. "Obviously, any new rule requires new administrative work to implement," the letter said.
Those organizations and companies further argued that if the U.S. Treasury Department or the IRS didn't provide relief, catch-up contributions for 2024 might have been at risk.
Related: IRS Delays IRA RMD Rules Again
High earners get more time
However, last year, the IRS announced relief for high earners subject to the new Roth catch-up contributions rule,. This was welcome news for many plan sponsors and employers who had advocated for more implementation time.
The agency says Roth catch-up contributions for high earners age 50 or over will not be required until 2026. (The new rule has been delayed for two years.)
The IRS also clarified that plan participants aged 50 or older can make pre-tax catch-up contributions for now, regardless of their income level.
Transition planning. With the IRS delaying mandatory Roth catch-ups for high earners until 2026, there's a window of opportunity to maximize pre-tax contributions.
This means leveraging current rules allowing pre-tax catch-up contributions through 2025. This could help reduce taxable income in the short term while building retirement savings.
And while 2026 may seem far away, it may be good to plan for the Roth catch-up transition. Work with a financial or tax planner to understand how the shift to Roth catch-up contributions might impact your tax situation and retirement planning.
What are the 2024 401(k) catch-up limits?
The IRS has said the 401(k) catch-up contribution limit for employees age 50 and the limit for those who participate in 403(b), and most 457 plans, as well as the federal government’s Thrift Savings Plan, remains at $7,500 for 2024.
The contribution limit for employees who participate in 401(k), 403(b), and most 457 plans, as well as the federal government's Thrift Savings Plan, however, increased for 2024 to $23,000. (That's up from the 2023 limit of $22,500.)
Catch-up contribution limits for 2025 haven't yet been announced. Stay tuned.
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