Government Forces Rich Retirees Into Roth Catch-Up Contributions
Published Date: 1/13/2025
Proposed Rule
Summary
Starting soon, people aged 50 and older who save extra money for retirement (called catch-up contributions) will have new rules thanks to the SECURE 2.0 Act. Some of these extra savings must now be made as Roth contributions, which means paying taxes now but enjoying tax-free money later. Employers, workers, and plan managers should get ready and share their thoughts by March 14, 2025, before a public hearing on April 7.
Analyzed Economic Effects
9 provisions identified: 6 benefits, 2 costs, 1 mixed.
Roth Requirement for High Earners
If your employer paid you more than $145,000 in FICA wages in the prior calendar year, any catch-up contributions you make must be designated Roth contributions (taxed now, tax-free later). The $145,000 wage threshold is subject to cost-of-living adjustments and the SECURE 2.0 changes apply to taxable years beginning after December 31, 2023.
Higher Catch-Up Limits at Ages 60–63
For taxable years beginning after December 31, 2024, participants who attain age 60, 61, 62, or 63 during the year may be permitted higher catch-up limits: 150% of the otherwise applicable dollar catch-up limit (for example, $11,250 = 150% of $7,500 for non-SIMPLE plans, and $5,250 = 150% of $3,500 for SIMPLE plans), with those higher amounts subject to cost-of-living adjustments.
Higher SIMPLE Catch-Up for Very Small Employers
For taxable years beginning after December 31, 2023, certain SIMPLE plans sponsored by eligible very small employers (for example, plans that had no more than 25 employees with $5,000 compensation in the prior year) may use an increased catch-up limit equal to 110% of the 2024 SIMPLE catch-up limit (for example, $3,850 = 110% of $3,500), with cost-of-living adjustments thereafter; employers that elect this increased limit may be required to make additional matching or nonelective contributions.
Plans Not Required to Offer Roth Programs
The proposed rules do not require an employer plan to include a qualified Roth contribution program. If a plan does not include a Roth program, participants who are subject to the Roth catch-up requirement would not be permitted to make catch-up contributions under that plan (the maximum permitted catch-up amount for such participants would be treated as $0), and the proposed regulations explain when that outcome does not cause a nondiscrimination failure.
Plans May Deem Pre-Tax Elections Roth
For taxable years beginning after December 31, 2023, a plan may provide that a participant who is subject to the Roth catch-up requirement is deemed to have irrevocably designated any catch-up contributions as Roth contributions, and the plan must record them in a designated Roth account and include them in gross income.
Two-Year Administrative Transition Relief
The Treasury treats the first two taxable years beginning after December 31, 2023 as an administrative transition period for the Roth catch-up requirement; during that period, catch-up contributions by participants who are subject to the Roth catch-up requirement will be treated as satisfying the requirement even if they are not designated Roth contributions.
Roth Contributions Made Earlier Count
The proposed rules allow designated Roth contributions made earlier in the year (before a limit is reached) to be counted toward satisfying the Roth catch-up requirement; if a participant's total designated Roth elective deferrals during the year equal or exceed the catch-up amount, the Roth catch-up requirement is satisfied.
No Aggregation of FICA Wages Across Employers
For a participant in a plan maintained by more than one employer (including a multiemployer plan), the participant's FICA wages from one participating employer for the prior calendar year are not aggregated with FICA wages from another participating employer for purposes of determining whether the $145,000 Roth catch-up wage threshold is exceeded.
Puerto Rico Catch-Up Limit Exception
An applicable employer plan that covers employees in both the United States and Puerto Rico will not fail nondiscrimination requirements merely because it allows participants subject to the Puerto Rico limit to make catch-up contributions only up to that Puerto Rico limit; for taxable years beginning in 2024, that Puerto Rico catch-up limit is $1,500.
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