Secure Act 2.0 Part 3
By Ben Dolan
Much of the Secure Act 2.0 provides those saving for retirement, and those sponsoring retirement plans, with greater flexibility regarding saving/contributing and the tax impact of doing so (e.g. creation of Roth SIMPLE Accounts). Not so with changes to Catch-Up Contributions for High Wage Earners.
Currently, if you’re age 50 or older, you can make catch-up contributions to your retirement accounts. For example, in 2023, those under 50 years old can contribute $22,500 to their 401(k), while those over 50 can contribute $30,000, given the allowable catch-up contribution of $7,500. Depending on the employee selection, catch-up contributions are either pre-tax or Roth.
Starting in 2024, those who are eligible for catch-up contributions in 401(k), 403(b) and 457(b) plans with wages above $145,000 for the preceding calendar year must allocate their catch-up contributions to the Roth portion of their plan. Note, this provision does not apply to catch-up contributions to IRAs and SIMPLE IRAs (which allow for $1,000 and $3,500 in catch-up contributions, respectively, in 2023). Note that the rule applies to those with wages over $145,000 but would not necessarily apply to business owners with income above $145,000 (would apply only if their wages are above $145,000).
The ability to make pre-tax catch-up contributions may arise for those changing jobs even if their wages exceeded $145,000 in the preceding year. As written, the legislation asks the employee if they earned more than $145,000 in the previous year from the employer sponsoring the plan in which they are currently enrolled. Since a job change was made, the answer would be no, and the employee could make catch-up contributions pre-tax until they answer yes in subsequent years.
More to come soon.
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Ben Dolan and Michael Foster are investment advisor representatives of Dolan Capital Advisors a North Carolina state-registered investment adviser. Investment advice offered through Dolan Capital Advisors, Inc.