New Retirement Rules for High Earners: What You Need to Know About the SECURE 2.0 Act

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Are you a high-earning individual over the age of 50 contributing to a workplace retirement plan? If so, some recent changes in retirement law may affect your catch-up contributions. The SECURE 2.0 Act introduced a new rule that changes how certain high-earners make their catch-up contributions, shifting them from a pre-tax to an after-tax Roth basis. While this change was initially set for 2024, the IRS has delayed its effective date until 2026 to give everyone time to prepare.

Who Is Affected?

This new rule doesn't apply to everyone. It's specifically for a combination of three types of people:

• High Earners: The rule applies to individuals whose prior-year Social Security wages exceeded $145,000. Remember, this threshold is based on wages from a single employer, so wages from different jobs aren't combined to determine if you meet this limit.

• Age 50 and Older: This change only impacts catch-up contributions, which are additional contributions allowed for participants aged 50 and older.

• Workplace Plans: The requirement applies to specific employer-sponsored plans like 401(k)s, 403(b)s, and governmental 457(b)s. It doesn't apply to individual retirement accounts (IRAs).

How Does It Work?

The core of this new rule is about the type of contribution you make. Typically, catch-up contributions can be made on a pre-tax basis, lowering your taxable income for the year you make the contribution. However, for those affected by the new rule, catch-up contributions must be made as Roth contributions. This means your contributions are made with after-tax dollars—they don't reduce your current taxable income. The big benefit is that when you retire, the money in your Roth account, including all the earnings, can be withdrawn completely tax-free.

Think of it this way:

• Pre-tax (Traditional) Contributions: Pay taxes later, in retirement.

• Roth (After-tax) Contributions: Pay taxes now, enjoy tax-free withdrawals later.

This new requirement essentially forces a decision for high earners—you're required to choose the "pay taxes now" option for your catch-up contributions.

When Does It Take Effect?

Originally, the SECURE 2.0 Act planned for this rule to take effect in 2024. However, the IRS recognized the need for an administrative transition period to allow employers and plan administrators to update their systems. As a result, the effective date has been officially delayed until 2026. This extension gives everyone plenty of time to get their plans in order and ensures a smoother transition for all parties involved.

What Should You Do?

If you fall into the affected category, it's a good idea to speak with your financial advisor or your plan administrator. While you have until 2026, understanding this change now will help you prepare and make informed decisions about your retirement savings strategy. This rule will require some adjustments to how you make your contributions, so being proactive will help you navigate the new requirements smoothly.

Questions 

Have questions about this change or how it may affect your retirement accounts? Our team of experts is here to help. Contact us.