Are You Taking Advantage of Catch-Up Contributions? SECURE Act 2.0 Changes You Need To Know

The Secure Act 2.0 enhances pre-retirees’ ability to boost their savings as they reach retirement age. Several changes are being implemented throughout 2024 and 2025 that are critical for any investor over 50, and high earners should pay particular attention. Let’s dig into what elements of catch-up contributions are changing and how pre-retirees benefit.

How Your Income Impacts Your Catch-Up Contributions: 2024 Changes

Starting in 2024, the SECURE Act 2.0 changed how high-income earners approach their catch-up contributions to employer retirement plans. We will review some basic terms and what catch-up contribution rules are changing. What are catch-up contributions? Employees ages 50 and over can contribute an additional amount to their company retirement savings accounts (ex: 401k or Roth 401k). The “catch-up” contribution limit is $7,500 in 2023. In 2024, the “catch-up” contribution limit will begin adjusting for inflation. What are employer-specific wages? Employer-specific wages include salary, RSUs, bonuses, and other stock options (except ESPPs, which are voluntary). Beginning in 2024, if your income is under $145,000/year in employer-specific wages…Your catch-up contributions can still go into the pre-tax portion of your 401k or company retirement savings account (403b, 457 plan). Beginning in 2024, if your income is over $145,000/year in employer-specific wages…Your catch-up contributions have to go into the Roth portion of your employer plan. Let’s look at a few examples to showcase how these new rules work.

Example: Individual With Wages Under $145,000/year

An individual who makes under $145,000/year in employer-specific wages can still take advantage of traditional catch-up contributions like they normally would before the SECURE Act 2.0. If this individual has a company 401k, they can max it out ($22,500 in 2023) and contribute up to the $7,500 (2023) extra catch-up contribution limit into the pre-tax portion of the plan.

Example: Individual With Wages Over $145,000/year

An individual who makes over $145,000/year in employer-specific wages has new rules to consider. All catch-up contributions made need to be routed to the Roth portion of the plan. This limits the amount employees can save on taxes by forcing catch-up contributions to an after-tax account. 

What Happens If You Switch Employers?

The way the legislation is currently written, employees ages 50 and over who switch employers part-way through the year are in a unique position. The SECURE Act 2.0 code states that as long as you don’t have $145,000 of income from your current employer for the year, you can still place catch-up contributions into the pre-tax portion of the employer plan. In other words, if you switch employers halfway through the year, and only earned $100,000 through Employer 1 during your employment in 2024, and are set to earn $120,000 from Employer 2 during your employment in 2024, you could still contribute up to the full $7,500 in catch-up contributions to the pre-tax portion of the employer plan. Additionally, suppose you make over $200,000/year in employer-specific wages at Employer 1 during your time at the company in 2024. In that case, you may have had to contribute catch-up contributions to a Roth account. However, if you switch to Employer 2 part-way through the year and make under $145,000 there for the remainder of the year, you can make catch-up contributions to your pre-tax 401k. Keep in mind that the total catch-up contributions from both employers cannot exceed the annual limit ($7500 in 2023).

2025 Considerations for Catch-Up Contributions

All of the changes listed above go into effect starting in 2024. However, additional changes will go into effect in 2025. Starting January 1, 2025, a new catch-up contribution will begin. The existing catch-up contribution for employees 50 and older stays in effect, but an additional one becomes available for employees ages 60-63. For most employer-sponsored retirement plans (401ks, etc.), this new “special” contribution limit will be $10,000 per year, adjusted to reflect inflation.

Have Questions?

Although these changes won’t be implemented until 2024 and 2025, pre-retirees must create a game plan for retirement contributions, tax savings, and career changes to maximize these new rules. If you have questions or want to understand how retirement account contributions fit into your holistic financial plan, contact us today by clicking here.