In December of 2022, Congress passed the Consolidated Appropriations Act of 2023 (HR 2617), which includes more than 90 provisions that impact IRAs and retirement plans sponsored by employees. These provisions are collectively referred to as SECURE 2.0. In this blog post, we will specifically discuss catch-up contributions and how this Act affects them. 

What are catch-up contributions?

Initially created in 2001, catch-up contributions permitted workers over 50 years of age to add bonus contributions to their retirement plans. This type of contribution could be added to any employer-sponsored retirement account, such as: 

• IRAs (both SEP and SIMPLE)
• 401(k)s
• 403(b)s
• Roth IRAs
• Roth 401(k)s 

The US government made the catch-up contribution provision permanent in 2006, 4 years before it was set to expire. 

How Does SECURE 2.0 Affect Catch-Up Contributions? 

Under current law, individuals’ additional contributions to their IRAs are capped at $1,000 and are not indexed for inflation. SECURE 2.0, which will take effect in 2024, will require that the limit be indexed on a yearly basis. Lawmakers hope that workers will build up more retirement funds as a result of indexing the catch-up contribution limit. 

Unique Limits for Ages 60-63

Starting in 2025, SECURE 2.0 will allow employees between the ages of 60 and 63 to make catch-up contributions up to $10,000 per year. This special limit for this age group will take effect in 2025. It is only applicable to employer-sponsored 401(k) or 403(b) plans. The dollar amount will be adjusted for inflation on a yearly basis. 

How does SECURE 2.0 affect employer-sponsored retirement plans?

In general, catch-up contributions are pre-tax if they are not sent to a Roth account. With this new provision, individuals whose yearly salary exceeds $145,000 can only make after-tax Roth contributions to their employer-sponsored retirement plan. If their plan allows it, individuals who make less than that amount will still be permitted to add Roth contributions.

The State of Catch-Up Contributions

SECURE 2.0 was passed and signed into law, however the American Retirement Association noticed an error in the bill: due to the elimination of a key paragraph, the new laws accidentally omitted the regulations that allow catch-up contributions to be made. If Congress does not address this mistake prior to the time the provisions become effective, both Roth and pre-tax catch-up contributions can not be made after 2023. It is unknown when the government will reinstate catch-up contributions, but the discussion is ongoing. According to Forbes, the error is considered to be a minor glitch and can easily be corrected. 

Contact SD Associates, P.C. Today

Unsure how SECURE 2.0 will affect your employees? We can help. Our tax experts can advise you on the best way to navigate these new provisions with ease. Contact our team of financial professionals at SD Associates, P.C. today at 215-517-5600 to set up a consultation.