The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2022 is a piece of legislation that was intended to improve American’s retirement savings and long-term financial security. While many of the bill’s provisions went into effect in 2023, some provisions required additional guidance that’s still being released. The Department of the Treasury (DOT) and the Internal Revenue Service (IRS) recently issued final regulations around the SECURE Act 2.0’s catch-up contribution limits.
Key Takeaways
- Key SECURE Act 2.0 changes to catch-up contributions impact high-income earners nearing retirement.
- If you’re impacted by these new regulations, there are several steps you can take to prepare.
- Your wealth manager can make sure your financial plan continues to meet your needs and help optimize your retirement savings in light of these regulatory changes.
What has Changed for High Earners?
Final regulations issued by the DOT and the IRS clarify several SECURE Act 2.0 provisions surrounding catch-up contributions to employer-sponsored retirement plans for participants age 50 or older.
Roth Catch-Up Contribution Mandate
Beginning January 1, 2026, employees age 50 and older with prior-year wages over a certain threshold must make catch-up contributions to a Roth (after-tax) source. The inflation-adjusted income threshold for 2025 is $150,000. If you earn more than this amount in 2025, all of your 2026 catch-up contributions must be designated as Roth.
If your income exceeds this threshold and your employer doesn’t offer a Roth contribution option in your retirement plan, you won’t be eligible to make a catch-up contribution to your employer-sponsored plan.
Preparing for the New Catch-Up Rules
If you’re age 50 or older and exceed the income threshold, it’s important to make sure you can continue to optimize your retirement savings once the new restrictions on catch-up contributions take effect. The following tips can help you prepare.
Confirm Roth contribution options with your plan
If your income exceeds the threshold for pre-tax catch-up contributions, you’ll need to determine whether your employer-sponsored plan allows for after-tax contributions to a Roth source. If not, you may need to establish a new retirement savings strategy to help maximize your savings potential.
Reevaluate other retirement savings strategies
A smart retirement planning strategy is to save in a variety of accounts with different tax treatments. Doing so provides you with flexibility to develop a tax-efficient retirement withdrawal strategy while also reducing your taxable income in the current year.
Different retirement savings vehicles have different tax exposure, including:
Tax-deferred accounts
When you contribute to a tax-deferred account, such as a traditional IRA or 401(k), you do so with pre-tax funds, which lowers your taxable income during the year in which the contribution is made. You’ll later be taxed on these assets as ordinary income when you withdraw them in retirement.
Taxable accounts
Assets held in bank accounts and nonqualified investment accounts are continually subject to taxes at either ordinary income or capital gains tax rates.
Tax-exempt accounts
Assets contributed to tax-exempt accounts, such as Roth IRAs and 401(k)s, are made with after-tax funds, which means they don’t reduce your taxable income during the year in which they’re made. The benefit is that these assets can be withdrawn tax-free in retirement.
The key is to have a good balance between the various types of tax treatments. If your catch-up contributions are reclassified to tax-exempt (also known as Roth) assets, you may need to look for ways to increase your tax-deferred retirement savings. For example, it may make sense to open a traditional IRA if you don’t already have one. Or, if you’re not already maxing out your pre-tax source of retirement savings, you may decide to increase your pre-tax deferral.
Your wealth manager can help you identify opportunities to maximize the tax efficiency of your retirement savings.
Identify other tax-saving opportunities
If your catch-up contributions are impacted by this change, you may need to find other ways to minimize your tax exposure in the current year. Examples include:
