The Treasury Department and Internal Revenue Service (IRS) have finalized regulations on retirement “catch-up” contributions, clarifying how provisions from the SECURE 2.0 Act will apply to workers and employers in the coming years.
Why It Matters
Catch-up contributions allow employees aged 50 and older to set aside extra money in workplace retirement plans.
Under SECURE 2.0 (Setting Every Community Up for Retirement Enhancement 2.0 Act of 2022), certain higher-income workers will be required to make these contributions on an after-tax Roth basis rather than pre-tax.
What To Know
The SECURE 2.0 Act is a major federal retirement law that was signed in December 2022. It built on the original SECURE Act of 2019 and included more than 90 provisions designed to expand retirement plan access, increase savings, and simplify plan administration.
The law primarily affects workplace retirement accounts such as 401(k), 403(b), SIMPLE, and IRA accounts. Its goals were to help Americans save more for retirement and make the system easier for both employees and employers.
The final rules, released this week, are intended to guide plan administrators on how to implement the Roth catch-up requirement.
Stock image/file photo: Documents relating to a 401(k) with a magnifying glass.
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After-tax Roth contributions are retirement savings that you make with money that has already been taxed. Unlike traditional 401(k) or IRA contributions, where you get a tax break up front and pay taxes later when you withdraw the money, Roth contributions work the opposite way.
You pay taxes on the money now, but your savings grow tax-free, and you won’t owe any taxes when you take the money out in retirement, as long as certain rules are met.
Under the SECURE 2.0 Act, higher-income workers ($145,000 and up) who make “catch-up” contributions—the extra amounts allowed once you turn 50—will have to put those extra contributions into Roth accounts instead of pre-tax accounts.
This means they’ll pay taxes on that money immediately, but the funds will grow and be withdrawn tax-free later.
In addition to the Roth provision, the regulations address other changes under SECURE 2.0, including higher catch-up limits for workers ages 60 to 63 and rules for employees in newly created SIMPLE retirement plans.
While the final regulations largely follow the January proposal, the IRS made adjustments in response to public feedback.
Among the changes are that plan administrators can now aggregate wages from certain separate common law employers when determining if a participant must use the Roth option.
What Happens Next
Most of the new Roth catch-up requirements will take effect in 2027, applying to contributions for taxable years beginning after December 31, 2026. Some exceptions apply: certain government and collectively bargained plans have later start dates.