Some of the changes outlined by the SECURE (Setting Every Community Up for Retirement Enhancement) Act 2.0 of 2019, signed into law in December 2022 have been implemented, although some are still on the horizon. This article will address changes that will impact 401(k) plan participants starting as soon as 2024. The most relevant changes to 401(k) plan contributors are as follows:
Larger 401(k) Catch-Up Contributions
As of 2023, Americans can contribute $22,500 to qualified workplace retirement plans like a 401(k) or a 403(b). If they’re 50 or over, standard catch-up contributions allow them to save an additional $7,500 per year.
Secure Act 2.0 introduces a new category of catch-up contributions for workers aged 60 to 63. Starting in 2025, there will be a new catch-up contribution limit for these older workers: the greater of $10,000 or 150% of the standard catch-up contribution limit. These limits will regularly increase with inflation.
Today you can choose to deposit standard catch-up contributions in either pre-tax accounts or after-tax Roth accounts but starting in 2026 all catch up contributions must be deposited in Roth accounts, with an exception for employees with compensation of $145,000 or less. Employees of $145,000 or less may continue to have their catch-up contributions applied to their pre-tax accounts.
Although the catch-up contributions limits are increasing, the loss of the ability to direct catch-up contributions to the traditional 401(k) plan will increase income taxes for those who make these contributions.
Roth Employer Match
Existing rules require that any employer matching contributions be designated as pre-tax and did not allow them to be made as Roth contributions. As of Dec. 29, 2022, participants have the option to receive employer matching contributions on a Roth or traditional basis.
While this option is now allowed, it’s up to employers and plan providers to provide this option, as it’s not a mandated change.
Automatic 401(k) Transfers
Switching jobs frequently can advance your career more rapidly than staying with the same employer for decades. Unfortunately, if you’re a serial job hopper that also means frequently rolling over your 401(k)-retirement savings.
Secure Act 2.0 includes a provision that helps ease this pain point for people with smaller account balances. It allows for the automatic transfer of any previous retirement account with a balance of under $5,000 to your new employer’s plan.
This can help you keep your retirement savings in one place you can track and keeps your retirement savings from previous employers from being lost in the ether earning no interest. The changes outlined in the SECURE Act 2.0 can significantly improve your ability to reach your retirement goal whether you’re just starting out in your career, or you are 50 years old or older and are trying to catch up. For the younger 401(k) plan contributors having the ability to direct your employers matching contributions into your Roth 401(k) plan can help you create an even larger pool of assets that may provide you more income tax-free income after age 59½ and will not be subject to required minimum distributions (RMD). For those of you who are age 50 or older, the increase in catch-up contribution limits, in addition to another increase in catch-up contributions limits at age 60-63 can help you save even more. To determine if you should direct your current, catch-up, and employer match contributions to your traditional or Roth 401(k) plan you should seek guidance from your financial advisor or accountant. If you don’t have a trusted advisor, seek out a Nepsis Advisor for a consultation.
Advisory Services offered through Nepsis, Inc., an SEC Registered Investment Advisor.
Sources:
Secure Act 2.0: What You Need to Know – Forbes Advisor
401(k) catch-up contribution limit changes coming in 2026: 4 things you should know now
(msn.com)
Secure 2.0_Section by Section Summary 12-19-22 FINAL.pdf (senate.gov)