Since 2019, Congress continues to place a growing number changes as well as restrictions on Americans’ retirement planning. 

Passed in December 2022, Secure Act 2.0, which stands for “Setting Every Community Up for Retirement Enhancement,” was designed to further improve retirement-saving opportunities. 

One would believe expanding personal choices would be an enhancement.   

Think again.

Planned changes for 2024.

For Secure Act 2.0, when lawmakers drafted changes to 401k catch-up provisions (currently $7,500 additional to 401k plans by those over age 50) they “mistakenly” left out specific language. As a result, under their original Section 603, no participant could make catch-up contributions whether on a pre-tax or Roth basis starting in 2024. 

This was a big problem.

Congressional leaders said this was not the intended outcome, but instead to broaden the amount of employers offering a Roth option in their 401k plans. Interesting, cause simply mandating a Roth option in 401k plans does this and provides more choice for everyone.  

Instead, Congress determined it was best to require individuals who earned more than $145,000 in FICA wages the previous tax year to make all catch-up contributions on a Roth basis only. Meaning, it eliminated the choice of taking upfront tax break on catch-up contributions for “higher earners” by only allowing these deposits in after-tax Roth accounts. 

With this as the only catch-up option available, lawmakers know this pressures employers to update both retirement plans to allow the Roth option AND align payroll service capabilities with retirement plans to identify those who earned more than $145,000 in FICA wages the previous year. 

The cynic in me asks:

• Why is this link being established?

• What’s in future laws given these new aligned capabilities?

• When did $145,000 become the new $400,000 for “high earners”? 

It gets complicated.

Beyond employers, plan administrators and plan/payroll service providers having to update capabilities at additional costs, there are several unanswered questions on how to execute. 

For example, what’s in place to allow an employer to verify a new employee’s FICA wages made the previous year at a former employer? Or what of those who don’t have FICA wages and are omitted from the new law, like state and local government employees or partners at a law firm? Ironic or mistakenly omitted?

This led to over 200 entities made up of Fortune 500 companies, firms, and public employers, plus the American Retirement Association and plan administrators including Schwab, Vanguard, and Fidelity to ask Congress for a two-year delay to the Roth catch-up rule to 2026.

IRS delays changes until 2026.

On August 25, 2023, the IRS released Notice 2023-62 which pushed enactment of Section 603 out to January 1, 2026. 

Thus, it is business as usual for 2024 and 2025, while stakeholders work behind the scenes to get compliant. It also gives time for revised Congressional legislation.

Your next steps.

If over age 50, you can continue making catch-up contributions to 401k plans based upon your personal choice of what’s best for you now and later in retirement, regardless of income.

 Now, don’t get me wrong, the Roth 401k selection can have tremendous benefits. 

Furthermore, I’ve actively illustrated to clients the potential benefits and drawbacks to switching to the Roth 401k option. But in the end, it should be about choice for the individual to do what is best for them in planning for their retirement.

If you don’t know which choice is right for you, talk to your Certified Financial Planner.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Glenn Brown is a Holliston resident and owner of PlanDynamic, LLC, www.PlanDynamic.com. Glenn is a fee-only Certified Financial Planner™ helping motivated people take control of their planning and investing, so they can balance kids, aging parents and financial independence.

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