SECURE Act 2.0, signed into law at the end of 2022 and building upon the original SECURE Act from 2019, includes provisions affecting many areas from student loans to 529 plans to employer retirement plans.
One of the changes that hasn’t received a lot of press, however, is the new requirement that employees who make more than $145,000 and make catch-up contributions to their retirement plan must make those catch-up contributions as after-tax Roth contributions.
Currently, an employee can make these contributions on a pre-tax basis, meaning that they get a tax deduction for the contribution in the current year, and they will pay taxes on the contributions and any growth on those funds when they withdraw the funds in retirement. With a Roth contribution, the employee does not take a deduction now, but the contribution and all of its growth can be withdrawn in retirement without income taxes.
If you’re losing the ability to choose to make these contributions on a pre-tax basis, why would I say that these changes are good? Here are a few reasons:
- Many qualified retirement plans currently do not offer a Roth option. The SECURE Act 2.0 will be the impetus for many plan providers to incorporate Roth options.
- For most people, making more than $145,000 means they are not eligible to contribute directly to a Roth IRA (because they’re over the income limit). For those with plans that do not offer a Roth option, this change will give them more choices when planning for retirement.
- This change will likely force some diversification in retirement savings and, therefore, in retirement income options. If we’ve worked together for any time, you know I’m a big proponent of diversifying your income sources.
Since the Secure Act 2.0 passed, the IRS has issued further guidance delaying this provision until 2026 to give employers and plan administrators time to comply.
This content is intended to be educational and thought-provoking rather than financial advice. When we work together in a financial planning engagement, we discuss your unique personal situation and goals. We examine these factors and many others during our financial planning process to determine appropriate financial strategies for YOU.