Secure Act 2.0 Brings Big Changes to Catch-up Contributions

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Secure Act 2.0 Brings Big Changes to Catch-up Contributions

Zachary Harrington

The SECURE Act 2.0 is the latest piece of legislation that brings significant changes to the financial planning landscape. The SECURE Act 2.0 that passed into law at the end of 2022 has close to 100 separate provisions – most of these changes have very little impact on working Americans. One provision, however, will drastically shift savings for workers in the “catch-up” phase for retirement accounts and also sets the table for future changes to come.

 

The Catch-up contribution is a rule that impacts employees 50 and over – the rule allows for increased contribution limits (Pre-Tax or Roth) for those people as a means of making sure that they receive every opportunity to save in a tax advantaged (Pre-Tax or Roth) account and better prepare for retirement. In 2023, workers can save $22,500 into their 401(k) plan as a standard contribution and up to $7,500 as a catch-up contribution (these can be done Pre-Tax or Roth or a combination). This is a pretty large increase from 2022 numbers and the contributions are treated the same for 2023 as they would for 20221. 

 

The big change to the Catch-up rule is set to go into effect on 1/1/2024. With this pending change, employees can still contribute Pre-Tax or Roth on their standard contribution. However, for High-Wage earners ($145,000 or more in wages) they will only be able to make catch-up contributions as Roth contributions2. Meaning the additional savings would be taxable in the current year but will get the Roth benefits moving forward. This change makes the governments intentions very clear – they need tax revenue NOW, not in the future. This is likely the first step towards shifting retirement planning away from the Traditional IRA and Traditional 401(k) concept.

 

This change also impacts non highly compensated employees (<$145,000) due to a unique rule with the provision. If your 401(k) plan does not ALREADY have a Roth 401(k) option or doesn’t add one in 2023, a high earner CANNOT make a catch-up contribution in 2024. This also means NO ONE can make a catch-up contribution3. This places the burden on employers to make necessary changes prior to 2024 in order to ensure catch-up contributions are available for all.


Given the 12-month sunsetting of current catch-up rules there are some timely planning items that can be done:

  • Maximize Pre-Tax contributions in 2023 while you still can – for 2023 you can contribute $22,500 Standard + $7,500 of Catch-Up.
  • Contact your employer to make sure they offer or intend to offer a Roth 401(k) option
  • Proactively plan for changes in 2024 and the impact it will have on your Families tax landscape, you may need to:
    1. Adjust your payroll withholdings
    2. Complete a tax pro-forma to understand the effective impact on your tax bill
    3. Evaluate other tax efficient investment vehicles
    4. Evaluate outside savings opportunities if your employer does not amend your existing plan
    5. Evaluate Donor Advised Funds as a way to lower tax burden
  • There are positives on the planning side:
    1. Most high wage earners struggle to get Roth contributions in due to 1) Wage limits 2) Pro-Rata rule restrictions
    2. Roth Accounts have many unique benefits:
      • Tax-free growth and tax-free distributions
      • They provide income diversification in retirement. Having different account registrations allows you to limit taxable income in retirement. Allowing for healthcare subsidies, enhanced property tax credits and many other items.
      • They are not subject to Required Minimum Distributions
      • They are inherited tax free

As employees evaluate these upcoming changes it is important to reach out to their financial advisor or tax planner to understand the impact to them and their family. We will be sure to provide more updates on SECURE Act 2.0 but this provision seems to make the largest impact on our clients.

  1. U.S. Congress, House, Setting Every Community Up for Retirement Enhancement (SECURE Act 2.0) Act of 2022.  117th Cong., introduced in Senate December 2022, www.finance.senate.gov/imo/media/doc/Secure%202.0_Section%20by%20Section%20Summary%2012-19-22%20FINAL.pdf 
  2. U.S. Congress, House, Setting Every Community Up for Retirement Enhancement (SECURE Act 2.0) Act of 2022.  117th Cong., introduced in Senate December 2022, www.finance.senate.gov/imo/media/doc/Secure%202.0_Section%20by%20Section%20Summary%2012-19-22%20FINAL.pdf 
  3. U.S. Congress, House, Setting Every Community Up for Retirement Enhancement (SECURE Act 2.0) Act of 2022.  117th Cong., introduced in Senate December 2022, www.finance.senate.gov/imo/media/doc/Secure%202.0_Section%20by%20Section%20Summary%2012-19-22%20FINAL.pdf 

 

Advisory services offered through Rise Advisors, LLC (“Rise”), a Registered Investment Adviser. This report is being generated as a courtesy and is for informational purposes only.

 

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