In a surprising move, the IRS announced that the SECURE 2.0 rule, which stated that catch-up contributions for high earners must go into Roth accounts, will be delayed until 2026. Originally scheduled to start in 2024, the delay provides a window for employers’ retirement plans to comply with the law and employees to reap the tax benefits of current catch-up contributions.
The rule requires employees aged 50 or above, who earned $145,000 or more the previous year, to direct their employer-sponsored catch-up contributions to a Roth basis account. This will eliminate the tax savings earned by contributing to traditional IRAs and 401(K)s for those affected.
IRS Fixes Mistake in SECURE Act 2.0
During the announcement, the IRS clarified that those aged 50 and over can continue making catch-up contributions regardless of income after 2023. This comes in reaction to a mistake made in the original bill. Certain language resulted in no participants being allowed to make any catch-up contributions after this year.
SECURE Act 2.0
The controversial Roth rule was passed in the SECURE 2.0 bill in late 2022. The bill is part of an initiative to encourage more Americans to save for their retirement. The bill introduces:
Reforms to Catch-Up Contributions
For those 50 or older, the IRS allows participants to contribute an additional $7,500 into their IRA and 401(k), the purpose being to help those behind on their retirement savings goals. SECURE 2.0 expands on this policy, allowing those 60 to 63 to contribute the greater of $10,000 or 150% of the catch-up contribution limit. Both limits are set to increase to meet the rising cost of living.
Automatic 401(k) Enrollment
Beginning in 2025, new retirement plans are required to automatically enroll employees in a 401(k). Contributions will start at the default 3% of an employee’s salary but will raise that number by 1% every year until it reaches 10%. Despite the automatic enrollment, this plan isn’t mandatory and employees can opt out if so desired. Plans from small businesses, the government, churches and new businesses are exempt from this requirement.
Delays to RMDs
Required minimum distributions (RMDs) ensure participants take out a minimum amount each year from their traditional IRA and employer-sponsored retirement account. Currently, RMDs are implemented when participants turn 72. The SECURE 2.0 bill pushes back this age further. RMDs will now begin at age 73 but will change to 74 after 2030 and 75 after 2034. Participants can choose not to take out money, reducing annual income and, as a result, taxes.
Emergency Distributions and Funds
Those facing an emergency who need to withdraw money from a 401(k) can now do so without the historical 10% penalty. The SECURE Act 2.0 allows participants to withdraw $1,000 with the option to repay the amount within a 3-year period. Employers can now establish and automatically enroll employees in emergency savings accounts linked to their retirement accounts. The account is limited to $2,500 but the first four annual withdrawals face no fees or charges. The account can be cashed out or rolled over into the retirement account when the employee leaves their job.
More Plan Options for the Self-Employed
Self-employed individuals are exempt from the Roth catch-up contribution rule. However, the SECURE Act 2.0 gives them the option to make their SIMPLE IRA and SEP contributions on a Roth basis. Those who choose this option will lose the current tax benefit but can withdraw funds completely exempt from later income tax.
What Does This Mean for You?
Large companies will face the biggest challenges of the “Rothification” update due to retirement plan and payroll changes. Employers can better prepare for the shift by ensuring their retirement plan options allow for Roth contributions. Additionally, an analysis of impacted employees and their current payroll system will better prepare them for the change.
Those impacted by the SECURE Act 2.0 Roth requirement still have two more years to benefit from the pre-tax contributions.
Consider preparing for the change ahead of time by consulting with a tax professional to determine the best course of action.
For more information about the employee retention credit, contact Richard Morris via our online contact form.
Councilor, Buchanan & Mitchell (CBM) is a professional services firm delivering tax, accounting and business advisory expertise throughout the Mid-Atlantic region from offices in Bethesda, MD and Washington, DC.
