Changes to Catch-Up Contributions: IRS Provides Administrative Transition Relief

Oct 10, 2023

By MichaelSilver

Retirement plan administrators have received a reprieve from an upcoming deadline that has been causing frustration throughout the benefits industry. The SECURE 2.0 Act of 2022 (SECURE 2.0) affects how certain retirement account holders may make catch-up contributions. SECURE 2.0 will require plan administrators to designate certain contributions as Roth contributions, regardless of what the account holder prefers. It states that this requirement will become effective after December 31, 2023. The IRS recently announced, however, that it will regard the first two years after the effective date as an “administrative transition period.” This means that the new rule for catch-up contributions will not apply to catch-up contributions for tax years 2024 and 2025. It will become effective for contributions on or after January 1, 2026.

What Are Catch-Up Contributions?

The Internal Revenue Code (IRC) sets limits on how much people can contribute to certain types of retirement accounts each year. This includes individual retirement accounts (IRAs), 401(k) plans, and 403(b) plans. Since people who are getting closer to retirement age might want to contribute more to their accounts, the IRC allows people who are at least 50 years old to make additional contributions over the statutory limit. These are known as “catch-up contributions.”

The IRS adjusts the contribution limits most years to account for changes to the cost of living. For tax year 2023, eligible account holders may make catch-up contributions in the following amounts:

  • Traditional or Roth IRA: $1,000
  • SIMPLE IRA or SIMPLE 401(k): $3,500
  • 401(k): $7,500
  • 403(b): Varies based on age, years of employment, and elective salary deferrals; typically varies from $3,000 to $7,500

What Are the Current Requirements for Catch-Up Contributions?

Under current law, catch-up contributions may follow the same rules and procedures as regular plan contributions. Account holders may also have the option to have catch-up contributions treated as Roth contributions.

Contributions to most retirement accounts, such as SIMPLE IRAs or 401(k) plans, occur “above the line.” This means that the account holder does not pay federal income tax on the amount of the contribution that comes directly out of their paycheck. They do not owe tax until they withdraw those funds from the account upon retirement.

Roth IRA contributions, on the other hand, occur “below the line.” The funds contributed to the account have already been taxed, so the account holder will not incur a tax bill when they make withdrawals after they retire.

By giving account holders a choice, current law allows them to decide when they will pay tax on their catch-up contributions. The new law takes that choice away.

What Changes Did the SECURE 2.0 Act Make?

SECURE 2.0 creates a new rule for retirement account holders whose wages were greater than $145,000 during the previous calendar year. The IRS may adjust this amount for inflation beginning in 2025.

Catch-up contributions for those covered by this new rule must be treated as Roth contributions, meaning they will be subject to taxation at the time of the contributions once § 603 of SECURE 2.0 takes effect.

The impact of these changes could be significant. It will change how plan administrators handle all catch-up contributions. Many administrators raised concerns about whether they will be ready to comply with the law by the January 1, 2024, effective date. The IRS has now given them additional time.

How Long Did the IRS Delay These Changes?

As described in our introductory paragraph above, on August 25, 2023, the IRS released Notice 2023-62, which announces a two-year “administrative transition period” for § 603 of SECURE 2.0 in order “to facilitate an orderly transition for compliance with that requirement.” Catch-up contributions made up until December 31, 2025, will not have to comply with § 603.

Find Out More About the SECURE 2.0 Act’s Requirements

If you have questions or would like additional information about SECURE 2.0, please contact your MichaelSilver professional at 847.982.0333.

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