The SECURE Act 2.0 which was passed in late 2022 called for significant changes to retirement plan access, eligibility, and saving opportunities for workers. Building upon the changes implemented in the original SECURE Act of 2019, the legislation calls for sweeping changes in several areas. While some provisions became effective in 2023, others will do so in 2024, 2025, 2026 and beyond. The extended timeline not only reflects the large number of changes but provides the time plan sponsors need to update processes to comply with changing rules.

One area in which there is significant confusion is with Roth catch-up contributions. Section 603 requires that catch up contributions made by high-net-worth individuals be made on a Roth basis. To accommodate the requirement, many plan sponsors need to make changes to plan structure and operation. It also means more time is needed to implement these updates. Earlier this month, the IRS released IRS Notice 2023-62 which provides important guidance. To help clients, prospects, and others, Hanson & Co has provided a summary of the key details below.

Key Guidance Details

Instead of mandating that catch-up contributions be Roth immediately, the new IRS guidance provides a two-year delay until the provisions will come into effect. This will impact those earning more than $145,000, who will now be able to make pre-tax catch-up contributions until 2026.

A technical error in the Act would have also eliminated catch-up contributions at the start of 2024, but this has also been addressed and fixed. The technical error was first noticed by the American Retirement Association in January, who alerted the Treasury Department and the Joint Committee on Taxation to address the issue.

The two-year transition provides taxpayers with additional time to ease into any new mandates that may apply to them. This should also make for an “orderly transition” for recordkeepers and plan sponsors in addition to participants.

What This Change Means

These clarifications of SECURE 2.0 make the questions around catch-up contributions much more straightforward. Instead of rushing into a plan, those earning over $145,000 now can conduct tax planning to ensure the change does not adversely impact their situation.

Traditional 401(k) accounts allow participants to postpone paying taxes on retirement savings until withdrawals are made ideally at a time when their income is substantially lower. This allows the opportunity to defer taxes on plan contributions until the taxable rate is reduced. If individuals who contribute to a retirement plan expect to be in a lower tax bracket, this can be an advantageous decision. Making catch-up contributions on a Roth basis entails paying taxes on retirement savings during years when earnings may be higher. Although individuals can withdraw the money tax-free during retirement, it may create potential tax planning issues.

What’s Next?

More guidance from the IRS is expected in the coming months, including clarifications on rules for former government employees, previously self-employed individuals, and multi-employer plans.

Contact Us

The two-year delay provides needed time for plan sponsors and participants to accommodate the upcoming change. It is important to speak with a qualified tax advisor to determine how you will be impacted. If you have questions about the information outlined above or need assistance with an accounting or tax issue, Hanson & Co can help. For additional information call 303-388-1010 or click here to contact us. We look forward to speaking with you soon.