The aim of SECURE Act 2.0 is to better strengthen the American retirement system by improving ways Americans can save for retirement.
According to the Federal Reserve’s 2022 Survey of Consumer Finances, 54.4% of Americans do not have a dedicated retirement savings account. The original SECURE Act was passed in 2019 and was designed to help more Americans save for retirement. Three years later, SECURE Act 2.0 updated the existing act and added over 90 new provisions enhancing the way people can save for retirement. Highlights of the updated act are: greater contribution limits, raising the age at which people must begin to take their Required Minimum Distributions (RMDs), requiring new retirement plans (i.e. 401ks and 403bs) to automatically enroll employees at a set contribution rate, and more.
Let’s dial in on the section of the Act that addresses catch-up contributions to retirement accounts. As a reminder, catch-up contributions are extra contributions that you can make to your employer sponsored retirement plan if you are 50 years of age or older. For example, in 2024 an individual can make a catch-up contribution up to $7,500. As part of Secure Act 2.0, starting in 2025, for individuals who are between the ages of 60 and 63, the catch-up contribution limit increases to $10,000. Yes, it’s a very small and specific age window, but it reiterates the legislations’ aim to help individuals grow retirement savings.
One caveat to the catch-up contributions: starting in 2026, individuals who have gross yearly FICA wages that are higher than $145,000 will no longer be able to make their catch-up contributions into the pre-tax side of their employer retirement plans. For many high-income individuals, putting money into the pre-tax side of their retirement plan has been one strategy to lower their annual tax obligation. However, with this change high-income earners will have to allocate their catch-up contribution to the designated Roth account of their retirement plan and pay taxes upfront.
While this change does eliminate the choice between pre-tax contributions or Roth that an individual who makes over $145,000 once had for their catch-up contributions, you may choose to look at this as a forced positive. Why? Because you can’t be taxed twice on retirement income (provided you withdraw it properly). While you will still have to pay taxes up front on the Roth contribution to your employer sponsored retirement plan, you will never have to pay taxes on those funds again. Let’s take a look at the Tax Control Triangle (see figure below) showing that tax-free employee retirement accounts make up just one side of the triangle.
At CWM, when we look at retirement planning and how to pay for expenses in retirement, we like to have choices of where that money can come from. Making sure that you have assets on each side of the triangle can help ensure that you have a level tax obligation in retirement. If large unforeseen expenses happen, you will not be forced to take funds from a taxable source if you have a tax-free source funded and ready.
Just like SECURE ACT 1.0 and other parts of SCURE ACT 2.0, there are still a few questions to be ironed out around the changes to catch-up contributions. As it stands, for individuals to be over the $145,000 threshold, the wages must be from FICA wages. This means that individuals who do not have FICA wages, such as the self-employed, are not subject to this change. There are also questions surrounding what individuals are supposed to or will be able to do if their current employer sponsored retirement plan does not offer a Roth side of the plan. These questions and others are the reason the change will go into effect in 2026 instead of the original 2024 target. We will continue to monitor the changes as they happen and keep you informed.
We also encourage you to keep an eye out for our annual guide and checklist for the upcoming tax season. It’s a great reference as we near the end of the fiscal year.
If you are interested in a more robust conversation regarding changes stemming from SECURE ACT 2.0 or the “Tax Control Triangle”, please Contact Us or call the office at (425) 778-6160 to schedule an appointment with your CWM advisor.
*Neither Comprehensive Wealth Management nor Independent Financial Group (IFG), LLC offer tax advice. Please consult your CPA for specific tax questions.
As a financial planner with CWM, Jason works closely with our clients to ensure their needs are met and exceeded. Jason is a capable and seasoned problem-solver, providing service on a variety of complex topics while keeping client's end goals in mind.
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