The SECURE (Setting Every Community Up for Retirement Enhancement) Act, which provided a slate of changes meant to strengthen the retirement system in the U.S., was first signed into law December 2019. Three years later, in December 2022, the SECURE Act 2.0 was signed into law and built on the retirement savings regulations set forth by the original act, adding 90+ new retirement plan provisions.
The SECURE Act 2.0, included a provision that requires high-income investors, ages 50 and over who make more than $145,000 per year, to make catch-up contributions to a Roth account instead of the traditional pre-tax account. Currently, a plan participant age 50 or over is eligible for an additional catch-up contribution of $7,500. The new rule, which applies to high-income participants in a 401(k), 403(b), or government 457(b) plans, was set to go into effect in 2024. Recently though, the IRS announced a delay to the catch-up contribution changes.
The delay was put in place after many employers and plan providers stated that they required more time to update their payroll systems and to implement a Roth option for their retirement plans if they currently did not offer one. Plus, the high-income plan participants were concerned if their company didn’t have a Roth option, under this new rule they would not be able to make catch-up contributions at all. Since the Secure Act 2.0 was aimed at helping people save more, this provision might have actually had a negative effect on retirement savings.
As a result, the IRS has set up a 2-year administrative transition period for the new Roth catch-up contribution requirements, delaying the implementation to 2026. According to the IRS, the transition period will give employers time to get all the behind-the-scenes mechanics in place, and will help plan participants transition smoothly to the new Roth catch-up contribution requirements.
The upside to the delay is it gives investors two more years to shield their catch-up contributions from taxation. Under the current rule, they could contribute into the traditional pre-tax plan the max $22,500 plus the catch-up of $7,500, adding up to $30,000 that is deducted from taxable income on their tax return. For the U.S Department of the Treasury however, it delays the potential boost in its revenue since, with the new rule, catch-up contributions will come from already-taxed income.
There is a positive side for high-income investors when the new rule does come into play. Under the new requirement, since catch-up contributions going into Roth accounts will be funded with dollars that have already been taxed, that means both contributions and earnings can be withdrawn tax-free in retirement. Another benefit of a Roth is there are no required minimum distributions (RMDs), meaning investments can grow tax-deferred for longer.
If you’re a high-income investor, enjoy the last two years of pre-tax catch-up contributions, but at the same time, consider the impact of the change in rules in 2026 on your retirement savings strategies. As always, Ciccarelli Advisory Services is here to help you in any way.