Secure Act 2.0 – Catch Up Retirement Contributions

Retirement plan contribution updates for high-income taxpayers

The Setting Every Community Up for Retirement Enhancement 2.0 Act (Secure Act 2.0) became law in late 2022. This legislation included a change that raises the limits on retirement plan catch-up contributions for participants who are age 60 to 63. Additionally, the Secure Act 2.0 mandated that catch-up contributions for high-income taxpayers only be allowed on an after-tax basis beginning in 2024. However, this particular aspect of the legislation created so much pushback from taxpayers and professionals that the IRS has since instituted a transition period for the effective date of this particular change (IRS Notice 2023-62).

Catch-up contributions in general

Participants in employer sponsored retirement plans such as 401(K), 403(b) and 457(b) are allowed to make salary elective deferral contributions into their retirement accounts. Participants who are 50 or older can make additional elective contributions over the standard limits. For 2023 and 2024 those additional amounts are $7,500. For those who participate in a Simple IRA, the additional amount is $3,500. The advantage of making these additional contributions is that they are a current deduction against the participant’s salary while putting more money in a tax advantaged retirement account.

Secure Act 2.0 change – increased limits

Beginning in 2025, retirement plan participants who attain age 60 through 63 may now increase their catch-up contributions to the greater of: 1) $10,000 (adjusted for inflation) or 2) 150% of the maximum regular catch-up amount for that year. For those with a Simple IRA, the maximum catch-up contribution is the greater of: 1) $5,000 (adjusted for inflation) or 2) 150% of the maximum regular catch-up contribution for that year.

Secure Act 2.0 change – no pretax catch-up contributions

The Secure Act 2.0 also contained language that says if you are a high-income earner, meaning your prior year FICA wages exceeded $145,000 (inflation adjusted) from your current employer, then you would only be allowed to make a catch-up contribution to a designated Roth IRA account (DRA) established by your plan. This would apply to any and all catch-up contributions, regardless of your age. The new rule essentially means that you can still defer the additional monies into a retirement plan, but the contributions will be after-tax, and you will not get a current deduction from your salary.

Interestingly enough, the requirement says $145,000 of prior year FICA wages from your current employer. So, if you had $200,000 in wages from ABC, Inc., in 2025 and in 2026 began working for DEF, Inc., being paid $300,000 a year, you would still be eligible to defer the entire catch-up contribution to a tax-deductible account in 2026 since you had no wages in 2025 from DEF, Inc., and were thus under the $145,000 threshold.

We expect guidance from the IRS which will state that partners in partnerships and self-employed persons are not subject to this requirement since they do not receive FICA wages.

While there are many advantages to making after-tax contributions to a DRA, included among them, tax-free withdrawals, no required minimum distributions and the ability to roll the DRA into a Roth IRA, many employers were not happy with the number of administrative changes and amendments that would need to be made to their retirement plans in a short amount of time. After receiving much in the way of negative feedback from employers, the IRS issued Notice 2023-62 pushing back the effective date of this change to January 1, 2026.

While 2026 might seem like a long way away, employers should make sure that they work with their plan administrators as soon as possible to make any plan amendments and changes so as to be in compliance with this aspect of the Secure Act 2.0 by the required date.

Questions about tax planning for your retirement? Contact your Keiter Opportunity Advisor.