What To Know About IRS' Catch-Up Contribution Guidance

As the Internal Revenue Service (IRS) moves toward new rules surrounding catch-up contributions for certain retirement plans, you may need to make some changes to contributions during the newly announced transition period if the rules apply to you.

Catch-Up Contribution Landscape

Historically, catch-up contributions have allowed participants aged 50 and above to contribute additional money to their retirement plans beyond the standard annual contribution limits. In 2023, for example, you can contribute up to an additional $7,500 beyond the elective deferral limit, if you’re age 50 or older.

The SECURE 2.0 Act, enacted in December 2022, introduced a pivotal change to catch-up contributions, requiring higher-income participants to make theirs as Roth contributions. In a Roth account, the contributions are made with after-tax dollars, but the distributions (or withdrawals) from the account are typically tax-free in retirement.

From 2024 onward, if you’re an employee with a 401(k), 403(b), or a government 457(b) retirement plan and earned more than $145,000 the previous year, you’ll have to follow the new rule mandating that extra contributions go into a Roth account if one is available in your retirement savings plan.

However, the IRS has indicated it will allow certain leeway in the initial phases of the transition.

Administrative Transition Period

As the curtain rises on the SECURE 2.0 Act’s new directives starting in 2024, the IRS has introduced an administrative transition period slated to last until 2026.

The transition period isn’t just a delayed implementation. It is a structured interval to “help taxpayers transition smoothly to the new Roth catch-up requirement and is designed to facilitate an orderly transition for compliance with that requirement.”

In essence, it’s a signal from the IRS that the agency understands that everyone needs time to align with the new rules.

Navigating the Transitional Period

As retirement plan participants and administrators chart their course through this change, preparation matters. Here’s a roadmap to navigate the challenges and opportunities:

1. Stay informed: With the SECURE 2.0 Act ushering in substantial changes, retirement plan participants should make an effort to stay up-to-date on them. This involves actively seeking information and understanding the nuances of the Roth directive if it applies to you, including familiarizing yourself with the eligibility criteria.
2. Leverage the grace period: The administrative transition period offers a buffer of several years for adjustment. Use this time to understand how the new Roth catch-up contribution rule affects you, primarily if your Social Security wages exceed $145,000.
3. Prioritize Roth contributions: If you fall within the income bracket outlined above, gear up for the shift toward Roth contributions. Remember that Roth contributions have their unique benefits, primarily tax-free growth.
4. Engage with professionals: Consider consulting with a financial planner, tax advisor, or retirement specialist to seek clarification and craft a strategy tailored to your situation to ensure optimal decision-making.