Law allows savers to boost accounts

Dec 21, 2023 • 4 min. read | By Jenny Callison

If you are age 50 or older, and you have some extra funds this month, you might want to consider playing catch-up with your retirement savings. Catch-up contributions (that’s what they’re called) to your retirement account are covered in the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act, signed into law a year ago.

“As the name implies, the idea was to help people who are behind on saving for retirement catch-up by saving more,” Pathfinder Wealth Consulting’s CEO and wealth adviser Jason Wheeler wrote recently.

The act set maximum amounts that people can funnel into retirement accounts each year on top of what they’ve contributed during the year. For 2023, the maximum catch-up for 401(k) and 403(b) defined contribution plans is $7,500. So, if a worker over 50 years of age has contributed the maximum of $22,500 this year to a 401(k) (or to a 403(b), its nonprofit employer counterpart), the total contribution would be $30,000.  But the $7,500 opportunity is available regardless of how much the worker has made in regular contributions.

There’s a catch-up component for IRAs as well, although the maximum is less: just $1,000. In 2023, the maximum regular IRA contribution is $6,500, but with this year-end extra contribution, a saver can bring that total to $7,500.

As its name suggests, the SECURE 2.0 Act was a refinement of the original, the SECURE Act of 2019. That legislation increased the mandatory age at which holders of retirement accounts – IRAs (but not Roth IRAs), 401(k)s and 403(b)s – had to begin taking annual Required Minimum Distributions from those accounts. In the time since SECURE was enacted, the RMD age has increased from age 70½ to 75, giving people more time to build up the value of those retirement savings before having to start withdrawing from them.

More changes are on the way in the next few years.

“Secure 2.0 also includes an opportunity for older retirement plan participants to supercharge their savings efforts,” Wheeler wrote. “In 2025, participants who are between the ages of 60 and 63 can make bigger catch-up contributions – either $10,000 or 50% more than the regular catch-up contribution amount for the year.”

SECURE 2.0 contains more than just welcome catch-up provisions, however, Wheeler pointed out. It changes the rules a bit for higher-income earners.

“Plan participants who earn $145,000 or more each year will no longer be able to make catch-up contributions to traditional plan accounts,” he wrote. “Instead, higher-income earners in 401(k) and similar types of retirement plans must direct any catch-up contributions to Roth plan accounts.”

As a reminder, Wheeler added, contributions to traditional plan accounts are typically made with pre-tax dollars so they may help reduce the amount of taxes owed today. In addition, any earnings in traditional plan accounts grow tax deferred. Taxes are owed when a distribution is taken.

The Roth-only catch-up provision for higher earners was supposed to take effect in 2024, but lawmakers realized that many workplace retirement plans don’t include Roth IRAs as an option. 

To address that little hiccup, Congress postponed to 2026 the effective date of the Roth-only provision, allowing for what legislators called an “administrative transition period.”

“This administrative transition period means that the new Roth catch-up contribution requirement is not required until 2026 and employers don’t need to add Roth as an option to retirement plans before 2026 to comply with this catch-up contribution provision,” the John Hancock website advises its clients.

David Shucavage encourages older workers and retirees to think about other opportunities Roth IRAs might present. Shucavage, founder and president of Carolina Retirement Planners, is a fan of the Roth IRA for more than just paying the tax on retirement funds now to allow the money to grow tax-free. He recommends setting up a Roth rather than a 529 plan to fund a grandchild’s college education. 

“Make the Roth payable to the child’s parent,” he advised. “That way, if the kid gets a scholarship and that money isn’t needed to pay for college, it can be spent in some other way.”

Shucavage reminds clients of another major change coming in 2026: The cuts contained in the Tax Cuts and Jobs Act of 2017 (TCJA) expire Jan. 1 of that year, increasing tax rates. Currently, married couples’ annual taxable income of up to $197,500 is taxed at 22%; for single taxpayers, the top of the 22% tax bracket is $95,375. Above that, married couples’ combined income of up to $364,200 is taxed at 24%; an individual’s 24% bracket extends to $182,100.

He notes that when the TCJA cuts expire, the current 22% tax rate will increase to 25%, and the 24% rate will rise to 28%. The 12% rate for lower-income earners increases to 15%.

Thinking ahead to what’s coming: Catch-up opportunities (but also Roth-only provisions for those earning $145,000 or more) as well as higher tax brackets, can help today’s pre-retirees and even those already enjoying retirement make timely decisions to maximize their future resources.