401(k) Catch-Up Contributions Rules

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The 2019 Setting Every Community Up for Retirement (SECURE) Act was expanded in December 2022. The SECURE Act 2.0 included new ways that employers and the government could help Americans save for retirement.

But in helping, SECURE 2.0 left many pre-retirees and retirees scratching their heads. There was confusion regarding required minimum distributions (RMDs) and catch-up contributions. What does it all mean and how do you plan for retirement under SECURE Act 2.0.

SECURE Act 2.0 Made Some Retirement Improvements

The SECURE Act 2.0 makes many improvements to saving for retirement. Seven ways the SECURE Act 2.0 affects retirement include:

1. automatic 401(k) enrollment
2. change in retirement minimum distributions (RMDs)
3. catch-up contributions
4. education saving and loan debt
5. savers tax credit
6. hardship withdrawals
7. emergency savings

The SECURE Act 2.0 allows for people to automatically be enrolled in some workplace retirement plans by the employer. And the savers tax credit will help lower-income earners save for retirement.

The hardship withdrawals allow people to use their retirement savings to pay for emergencies. For those with student loans, employers can match student loan payments to contributions made by the individual to employee retirement accounts.

There’s also a change in catch-up contributions to 401(k) plans and RMDs.

New Catch-Up Contribution Age Category

Currently, in 2023, Americans can contribute $22,500 to 401(k) or 403(b) plans annually. And if they are 50 or older, they can catch-up by contributing an additional $7,500 annually.

But, the SECURE Act 2.0 has added another category to catch-up. Starting in 2025, workers aged 60–63 have a new catch-up contribution limit. They can contribute an additional $10,000 or 150 percent of the standard contribution limit. These additional limits are indexed to inflation.

This new allowance better mirrors what’s going on in the workplace. Many Americans are in the workforce longer. While also having less access, if any, to pensions.

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When these individuals were younger, they may have found it challenging to save for retirement due to having children and their costs. It also reflects the economic environment and saving in lower earning years.

This change in age for catch-up limits allows individuals to increase their retirement fund before leaving the workforce.

Catch-Up Rules Different for High-Income Earners

In 2023, if you’re 50 years old or over, you can add an additional $7,500 annually to a 401(k) or 403(b) plan. But, the SECURE Act 2.0 changed the dynamic for higher-income individuals.

For 2024, if you are 50 or older and have earned $145,000 in the previous year, you can still make catch-up contributions. But you won’t receive any tax savings. Instead, you must make those extra contributions on a Roth basis. In other words, you must use after-tax monies.

And although you won’t receive tax deductions for the contributions, you can withdraw the funds tax-free. Currently, you pay taxes on withdrawals. But the main difference is that with the new regulations, you could be paying taxes based on a higher income than you would after retirement.

But there is a problem: when the SECURE Act 2.0 was written, specific language was left out. Because the language was omitted, any participant was prohibited from making catch-up contributions. This applied to a pre-taxed or Roth basis.

But lawmakers are aware of this and other errors; that’s why they are in the process of making corrections.

Another problem with the high-income catch-up rule occurred with plan providers. They needed time to modify systems to allow catch-up contributions to be made after tax.

IRS Announces Delay of New Catch-Up Requirements

Because of the complexities of setting up after-tax plans, many Fortune 500 companies complained and requested more time.

The result was a postponement of the new rule. In November 2023, the Internal Revenue Service (IRS) announced it would delay implementing the new catch-up Roth rule for those earning $145,000 or more. The new year the rule will take effect is 2026.

This gives these higher-earners two years to take advantage of pre-tax catch-up contributions.

New RMD Age Rules

If you have a workplace 401(k) plan or individual retirement account (IRA), you’re required to take a minimum amount of money out every year once you reach a certain age. This is called the required minimum distribution (RMD).

Before the SECURE Act 2.0, the age was 72 years old. This age triggered the RMD rule. But starting in 2023, the new age is 73. Gradually, the age will increase in 2033 to 75.

The longer you can leave funds in the retirement plan, the bigger they can grow.

A strategy to take RMDs is a retirement challenge. Remember, you'll be taxed on the pretax dollars that you withdraw. As your fund grows, so does your tax bill.

The SECURE Act 2.0 eliminated the RMD mandate for Roth 401(k) contributions. It makes sense to eliminate this since Roth money was already taxed when it was first contributed.

Help for Retirement Savers

The new age category for catch-up contributions better reflects what is happening in the workforce. And allows those who couldn’t save when they were young the ability to fund their impending retirement.

Raising the ages for RMDs allows retirement funds to grow longer. With the population living longer, this only makes sense.

Still, there are some problems with SECURE Act 2.0, which Congress will need to address.

The Epoch Times copyright © 2023. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.