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SECURE Act 2.0 Affects Catch-Up Contributions Thumbnail

SECURE Act 2.0 Affects Catch-Up Contributions

If you are 50 or older, the SECURE Act 2.0 created some big changes to how you can save for retirement.

In 2024, those over age 50 can contribute up to 25% of their compensation to a limit of $23,000.  In addition, they can make catch-up contributions to an annual max of $7,500. That's a total of $30,500!  Starting in 2024 this catch-up limit will be adjusted for inflation in increments of $100.

The catch-up provision will include an income limit for deductible contributions starting in 2024.  Those that earn above $145,000 in the prior year (2023), must have their catch-up contribution made to a Roth option in their retirement plan.  This means the catch-up is not longer deductible.  For folks in an high tax bracket this is a big deal as getting the deduction on the contribution can be quite beneficial.  

For example:  

  • Mary and Jim are married and file joint tax returns.  
  • They both max out their annual contributions to their company’s retirement plan.  
  • They each earn $150,000 which places them in the 24% marginal Federal tax bracket in 2023.

In 2024, they want to make the maximum catch-up contribution they each are eligible to make, which is $7,500.  Since they exceeded the $145,000 income threshold, they need to make the contribution to a Roth option and first pay ordinary income taxes on that contribution.  In this case, their contribution will be about $9,868 of income.  The difference is the taxes they must pay before the contribution to the Roth is made to get to $7,500.  

On the bright side, Mary and Jim will receive all the benefits of the Roth.  The money grows tax-free and so long as certain rules are followed, withdrawals are tax-free too.  If, however, Mary and Jim’s taxable earnings are lower when they retire, the withdrawals from their 401(k) would likely be taxed at a lower rate than their current bracket.  This makes the deduction on the catch-up more valuable since they theoretically saved the difference between the high tax rate when they earned it versus the lower rate when they withdrew it.  Of course, nobody can know what tax rates will be in the future, so using current tax rates is a reasonable way to estimate what the tax bite may look like in the future.  

Some retirement plan record keepers have pushed back on this requirement due to the complexity of tracking payroll and the availability of Roth options in plans, as not all plans have them.  Those that do not have the Roth option will either have to establish it, or eliminate catch-up contributions all together in the plan.  So check with your benefits department for details on your plan.  

Like everything else in life, the retirement savings landscape changes constantly and is complex.  Make certain that you have the resources at your disposal to keep up with how changes impact your retirement.  

Disclaimer:  The information provided herein was obtained from sources believed to be reliable and is believed to be accurate as of the time presented but is without any express or implied warranties of any kind. Neither First Step Wealth Planning LLC nor Erik Nero warrant that the information is free from error.

The information provided herein is not advice specific to you or your circumstances but is instead general tips and education. None of the information provided herein is intended as investment, tax, or legal advice. Your use of the information is at your sole risk. Before considering acting on any information provided herein, you should consult with your investment, tax, or legal advisor. 

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