The road to retirement is a marathon, not a sprint. For many, as they approach their fifties, the focus shifts to making a final push to boost their savings. This is where “catch-up contributions” come into play, allowing those aged 50 and over to make additional elective deferrals to their retirement plans.
Recently, the Internal Revenue Service (IRS) and the Treasury Department released final regulations that provide new guidance on these contributions. These rules reflect key changes from the SECURE 2.0 Act of 2022, and they are important for anyone planning their golden years.
The Big Change: Roth Catch-Up Contributions
The most significant update is a new rule for high-income earners. The new regulations state that for a participant whose Federal Insurance Contributions Act (FICA) wages exceeded $145,000 in the preceding calendar year, any catch-up contributions they make must be designated as Roth contributions. This means these contributions will be made with after-tax dollars, and qualified withdrawals in retirement will be tax-free.
This change is designed to impact high-income employees who are looking to save more in their retirement accounts. If your FICA wages from a single employer were above the adjusted threshold in the prior year, your catch-up contributions for the current year will need to be made on a Roth basis. The wage limitation will be adjusted for inflation for taxable years beginning after December 31, 2024.
Think of it like this: If your salary was $160,000 last year, and you are 50 or older, you will now have to make your catch-up contributions to a Roth account. This is a big shift from the previous rules, which allowed for pre-tax contributions regardless of income.
When the New Rules Take Effect
It’s important to note that these final regulations generally apply to contributions in taxable years beginning after December 31, 2026. However, the SECURE 2.0 Act amendments themselves have an earlier effective date.
There is a two-year “administrative transition period” for taxable years beginning after December 31, 2023. During this period, catch-up contributions made by an affected participant will be treated as satisfying the new requirements, even if they are not designated as Roth contributions. This gives employers and plan administrators time to update their systems to comply with the new rules.
More Flexibility for Catch-Up Contributions
The new regulations also address a few key areas of flexibility and clarification. For example, the rules confirm that a plan is not required to be corrected if the amount of the pre-tax catch-up contribution that should have been a Roth contribution does not exceed $250. This provides a small de minimis exception for minor errors.
Additionally, the final regulations clarify the treatment of special catch-up contributions for employees with at least 15 years of service in a section 403(b) plan. The document confirms that these special catch-up contributions are not subject to the new Roth catch-up requirement.
This is great news for long-term employees of non-profit organizations and public schools who may qualify for both types of catch-up contributions.
Expanded Limits for Workers Age 60-63
Beyond the Roth contribution rule, the SECURE 2.0 Act also introduced a higher catch-up limit for those nearing retirement. For taxable years beginning after December 31, 2024, participants who attain age 60, 61, 62, or 63 will have an increased applicable dollar catch-up limit.
For most retirement plans, this higher limit will be 150% of the normal applicable dollar catch-up limit. For SIMPLE plans, the increased limit is 150% of the applicable dollar catch-up limit in effect for 2025. This provides a significant opportunity for those in their early sixties to supercharge their retirement savings.
For example, if the standard catch-up contribution limit is $7,500, a person who is turning 60 can now contribute up to 150% of that amount. This is a powerful incentive for workers to maximize their savings just as they are getting close to retirement.
What This Means for You
These new regulations are a critical piece of the retirement planning puzzle, especially for those in higher income brackets. It is a good idea to review your personal financial strategy and speak with a financial advisor or your plan administrator to ensure you are in compliance.
Understanding the new rules on Roth catch-up contributions and the increased limits for older workers will help you make the most of your retirement savings opportunities.