"Catching Up on Saving for Retirement" by Julie Jason

Originally published: September 1, 2023 (distributed by Andrews McMeel Syndication)

Are you looking to catch up on saving for retirement?

     If you are 50 or older and worried about having enough money saved for retirement, you need to learn about catch-up contributions. First, let's talk about 2023; then, we'll address changes coming in 2024 and 2025. 

     Catch-up contributions are extra funds you can contribute to your retirement account when you are 50 or older (tinyurl.com/48dhafrf). 

     For 2023, the catch-up contributions for 401(k)s and 403(b)s (defined contribution plans) can be up to $7,500. If you want to maximize your contribution for the year, adding $7,500 to $22,500 (the maximum contribution for 2023) will bring you up to $30,000 that you can contribute to your 401(k) plan at work in 2023. 

     The catch-up contribution for an IRA in 2023 is $1,000, although that amount will be indexed to inflation starting in 2024. The maximum you can contribute to an IRA with the catch-up is $7,500 ($6,500 plus the $1,000 catch-up if you are 50 or older). 

     To stay on top of things going forward, keep in mind that you need to check yearly cost-of-living adjustments for both regular contributions and catch-up contributions. There are also yearly limits for the total amount that is contributed (tinyurl.com/2hvetkev). 

     Keep in mind that there are also limits to the amount an employer can contribute. 

     The 401(k) limit for an individual of any age for all contributions (including the employee's and the employer's) is $66,000 in 2023 (or 100% of a participant's compensation, whichever is less). 

     For an individual age 50 or older, the catch-up contribution increases the $66,000 maximum to $73,500 for 2023. 

     At the moment, catch-ups can be directed to pre-tax or Roth 401(k)s, if the plan provides for after-tax contributions -- not all do. But, starting in 2024, high earners will be constrained. 

     Section 603 of SECURE Act 2.0 requires catch-up contributions for high earners (income of more than $145,000 in the previous year) to be designated as post-tax Roth contributions, not as pre-tax contributions. 

     That means there is less freedom for you, the high-earning participant, to make a choice. Congress has taken that away from you, starting in 2024. If you are a high earner, your catch-up will be after-tax. (A lower earner is still free to choose.) 

     Pre-tax contributions lower your taxable income by the amount of the contribution. After-tax contributions do not. 

     However, after-tax contributions will grow tax-free forever (unless Congress has other ideas someday in the future). 

     An estimated 16% of the eligible participants in Vanguard defined contribution plans made catch-up contributions in 2022. Of those, about half had income over $150,000, according to Vanguard's "How America Saves 2023" report (tinyurl.com/342yx7wh).

     About 200 organizations signed a letter in July to the leaders of the House Committee on Ways and Means and the Senate Committee on Finance asking that the Roth catch-up requirement in Section 603 involving the $145,000 threshold be delayed for two years so that plan recordkeeping and compliance systems could accommodate the change (tinyurl.com/3a8rx525). 

     The issue was addressed on Aug. 25, 2023, through Notice 2023-62 (tinyurl.com/39jjufm7). The notice indicated that "the first two taxable years beginning after December 31, 2023, will be regarded as an administrative transition period" related to the Roth catch-up requirement and the $145,000 threshold, adding that during that time, catch-up contributions will be treated as satisfying requirements even if they are not designated as Roth contributions, and a plan that does not provide for designated Roth contributions will still be treated as satisfying requirements. 

     Further guidance from the IRS is expected. "The Treasury Department and the IRS intend to issue further guidance to assist taxpayers with the implementation of section 603 of the SECURE 2.0 Act," quoting Notice 2023-62.

     Now is a good time to talk to your tax adviser to address additional funding for your future retirement.