A catch-up contribution is a retirement savings contribution that allows people aged 50 or older to make additional contributions to 401(k) or similar retirement account such as a 403(b) and individual retirement accounts (IRAs). When a catch-up contribution is made, the total contribution will be larger than the standard contribution limit. This allows older workers to set aside more earnings for retirement. However, the SECURE 2.0 Act in 2022 is making several changes to catch-up contributions. Here’s what you need to know to plan for these changes.
401(k) Catch-up Contribution Changes Under SECURE 2.0
Currently, catch-up contributions allow those 50 and older to contribute an extra $7,500 into 401(k) plans beyond the $22,500 employee deferral limit for 2023. Under SECURE 2.0, workers who are at least 50 years old and earned $145,000 or more in the previous year must make their catch-up contributions on a Roth basis. This means contributions will have to be made using after-tax money. Workers won’t be able to get tax deductions on these catch-up contributions as they would with typical 401(k) contributions, but money can be withdrawn money tax-free after retirement. If you are making $144,999 or less in a tax year these changes will not apply to you. Additionally, under SECURE 2.0, a new special catch-up contribution is permitted for individuals between the ages of 60 and 63 beginning in 2025. At age 64, the traditional lower catch-up contribution limit would again apply.
IRS Update August 25, 2023
On August 25, 2023, the IRS announced that it is putting an administrative transition period in place until 2026 to delay the new requirement that catch-up contributions made by higher-income individuals participating in a 401(k) or similar retirement plan be treated as after-tax Roth contributions. The IRS’ two-year delay allows savers to continue to make catch-up contributions on a pre-tax basis through 2025.
If you are at least 50 years old or older, no matter your income level, you can continue to make catch-up contributions on a pre-tax basis through your employer-sponsored retirement plan. However, according to the IRS, those catch-up contributions will eventually (in 2026) have to be made on a Roth basis if your income meets or exceeds the $145,000 threshold. It’s a good idea to start planning now to determine the best way to maximize your retirement savings. At Method Financial Planning, we can help you create a well-thought-out financial plan for enjoying your retirement. Just ask. We’re here to help.