Some of the biggest benefits of the newly enacted Securing a Strong Retirement Act of 2022 (SECURE 2.0) are reserved for those age 50 and older who are trying to save as much as they can for retirement.
Which is why some of its most unique provisions are aimed at these “catch-up contributors.”
Inflation-linked catch-up limits for IRA participants
If saving for retirement though an IRA is your only option, the news hasn’t always been good. While the standard contribution limit rose from $6,000 in 2022 to $6,500 this year, catch-up contribution limits have been locked at $1,000 since 2006.
SECURE 2.0 fixes this catch-up stagnation. Starting in 2024, IRA catch-up limits will be indexed to inflation. Increases will be in $100 increments.
Bigger catch-up benefits for retirement plan participants
Retirement plan participants benefit from higher regular and catch-up-contribution limits. For example, in 2023, you can make regular contributions of $22,500, plus up to $7,500 in additional catch-up contributions, to your 401(k) plan. Contribution limits are linked to the most recent inflation rate.
But, starting in 2025, you’ll get the biggest catch-up contribution benefits if you’re age 60, 61, 62 or 63.
During these years you can contribute up to the higher of $10,000 or 150% of the previous year’s catch-up contribution limit.
But there’s a catch. The IRS assumes that those who can defer $30,000 a year or more in combined regular and catch-up contributions are probably making a very good living.
That’s why SECURE 2.0 eliminates pre-tax catch-up benefits for higher earners.
Starting in 2024, if you’re making more than $145,000 per year, all of your retirement plan catch-up contributions will have to be after-tax Roth contributions. This rule applies to 401(k) plans, 403(b) plans and 457(b) plans.
Keep in mind that this $145,000 threshold will only apply to W-2 income you receive from your current employer. Any side-gig, rental or investment income you earn outside your regular job doesn’t apply.
Your potential loss in pre-tax contribution benefits may be made up for by the fact that all distributions from a Roth retirement account made after age 59½ are tax-free, provided that the account has been established and funded for at least five years.
If that wasn’t enough, SECURE 2.0 provides two additional benefits to sweeten the Roth pot:
- Starting in 2024 you’ll never have to take Required Minimum Distributions (RMDs) from your Roth retirement plan account while you’re alive. This is good news if you want these assets to grow untouched for as long as possible or if you want your spouse or children to inherit these assets without having to pay taxes when they take distributions from the account.
- Starting this year, your employer can make matching contributions to your Roth retirement account, which they weren’t able to do before. Keep in mind that these matching contributions are made on an after-tax basis.
Your tax professional or financial advisor can help you figure if it makes sense to take advantage of any of these SECURE 2.0 catch-up provisions either now or later, given your specific retirement planning objectives.
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This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer before you implement any of these strategies.
This article was authored by Chris Gullotti and Jeffrey Briskin. Chris is a financial advisor and Partner located at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 508.598.1082 or cgullotti@canbyfinancial.com Jeffrey Briskin is Director of Marketing at Canby Financial Advisors.
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