As you should know, and providing a 401(k) plan permits it, participants who are age 50 or older can make additional elective deferrals, known as "catch-up" contributions. The catch up amount is inflation adjusted and for 2024 is $7,500. THE SECURE 2.0 Act two significant changes to the "catch-up" contribution, that you need to be prepared for. One takes effect in 2025 and the other in 2026.
- Age 60 thru 63 Increases the “Catch-Up” Limit - Beginning in 2025, SECURE Act 2.0, Sec 109, increases the “catch-up” limit for individuals who have attained ages 60, 61, 62 and 63 to the greater of $10,000 or 50% more than the regular inflation adjusted catch-up amount.
- “Catch-Up” Contributions for Higher Income Participants - Under the SECURE 2.0 Act, specifically section 603, certain eligible participants who earn more than $145,000 per year from their employer are required to have their catch-up contributions designated as Roth contributions.
This change was originally scheduled to take effect January 1, 2024, but to help taxpayers make a smooth transition, the IRS extended the effective date to January 1, 2026 (IR 2023-62 and IR-2023-155 released August 25, 2023).
This means that these contributions will be made with after-tax dollars, and while there is no immediate tax deduction, withdrawals from the Roth plan, including investment gains, are tax-free once the account owner reaches age 59½ and has held the plan for at least five years.
The effective date for this requirement was initially set, but the IRS has announced a 2-year administrative transition period to facilitate an orderly transition for compliance with this requirement.