The Secure Act 2.0 contains many changes to the rules governing retirement plan catch-up contributions. Unfortunately, when Congress drafted the bill, the Internal Revenue Code provision that allows for catch-up contributions was deleted in the process.
Assuming that it was an accident and Congress is able to fix the mistake, the rules governing catch-up contributions will become much more complex beginning in 2024.
While these new rules seem simple on their face, they create many complications that retirement savers and companies that sponsor retirement plans must understand as we move toward next year.
Secure 2.0 Changes
Under current law, individuals who have reached age 50 and older are permitted to make additional catch-up contributions to retirement accounts. For IRAs, the catch-up contribution limit is $1,000 in 2023 (the amount has previously not been indexed for inflation). Beginning in 2024, this $1,000 limit will be indexed for inflation.
For company plans, including 401(k) and 403(b) plans, the catch-up contribution limit is much higher ($6,500 in 2022 and $7,500 in 2023). Starting in 2025, a new, special catch-up contribution is permitted for taxpayers between the ages of 60 and 63. The contribution limit will be equal to the greater of (1) $10,000 or (2) 150% of the standard catch-up contribution limit for 2024. The $10,000 limit will also be indexed for inflation. Once the taxpayer reaches age 64, the regular (lower) catch-up contribution limit applies.
Starting in 2024, if the taxpayer has an income of at least $145,000 for the year, the catch-up contribution must be treated as a Roth contribution. That means these funds are contributed with after-tax dollars, so they will not reduce current taxable income, but can be withdrawn tax-free in the future. The $145,000 amount will also be indexed for inflation in future years.
Complications and Potential Pitfalls
The requirement that high-income taxpayers must treat catch-up contributions as Roth contributions will raise significant revenue for the government. Of course, it will also create new complications for plan sponsors. The $145,000 limit is a new limit — meaning that it is not related to the existing definitions for highly compensated employees.
