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SECURE Act 2.0 Makes Catch-up Contributions Taxable for High Earners

August 03, 2023

Editor's Note: As of August 25, 2023, this provision has been delayed until 2026.

Check out our updated blog for the latest details IRS Delays Mandatory Roth 401(k) Catch-up Rule until 2026.

There are changes coming to catch-up contributions in 2024. Under SECURE 2.0, for tax years beginning after 2023, catch-up contributions to employer-sponsored plans for highly compensated employees will be subject to mandatory Roth tax treatment. Let’s dive into the details.

What are catch-up contributions?

Check out our blog, SECURE 2.0 Enhances Catch-Up Contribution Opportunities for Retirement Savers.

If you’re 50 or older, you can make additional “catch-up” contributions of up to $1,000 annually to your employer sponsored accounts. So, you can contribute up to $7,500 as catch-up contributions for 2023 to your 401(k), 403(b) or 457 account ($6,500 + $1,000 IRA catch-up).

What’s changing?

Starting in 2024, under SECURE 2.0, participants who earn more than $145,000 will not be able to deduct catch-up contributions that you make to an employer sponsored plan.

Participants over this wage limit will only be able to make Roth catch-up contributions on which you will pay taxes upfront rather than when you withdraw the gains. Thereafter, this catch-up contribution amount will be indexed annually for inflation. This adverse change doesn’t apply to simplified employee pensions or SIMPLE IRAs. The IRS is expected to issue additional guidance on this provision of the new law.

In 2025, a new special catch-up contribution is allowed for taxpayers between 60-63 years of age. The limit is equal to the greater of $10,000 or 150% of the standard catch-up contribution limit for 2024 (indexed for inflation).

Will contribution limits change?

No, individuals will still contribute to an employer sponsored plan. Now, however, employers who allow catch-up contributions will need to start offering Roth plans alongside their regular pre-tax retirement plans.

Any exceptions?

People earning $144,999 or below are exempt. They can take a complete deduction of the amounts they contribute to an employer-sponsored retirement account, which includes any catch-up contributions.

What should impacted individuals do?

Workers who earn more than $145,000 in 2023 from a single employer can expect to be subject to the change. The change may cause high earners to rethink their decision to make catch-up contributions post 2023. According to a recent Vanguard report, 16% of eligible employees took advantage of catch-up contributions in 2022.

What should employers do?

Big changes are required for employers. If your employee retirement plan does not currently have Roth allocations of employee contributions, you will need to amend your Plan. You will need to contact your employee benefit plan and payroll service providers to add a Roth retirement provision to the plan. Not only does this require plan amendments, but they will need to also add provisions to accept Roth contributions. And this must be in place by December 31, 2023!

Questions? We can help.

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