Thought Leadership in Action

The federal SECURE Act 2.0 law will affect how financial advisors counsel clients in 2024 and beyond regarding catch-up contributions, particularly for higher-earning retirement plan participants. Advisors can help clients understand these changes, including the two-year delay for a provision affecting individuals making more than $145,000.

SECURE Act 2.0 is a wide-ranging federal law intended to give people more flexibility when it comes to retirement planning. The law aims to spur participation in workplace retirement plans, as well as increase contributions to those plans by employees and employers. Provisions include automatic 401(k) enrollment, expanded access to retirement funds and changes to catch-up contribution limits.

Learn more about 2024 IRS guidance on catch-up contributions, what the SECURE Act 2.0 affects, and when changes take effect.

What Are the 2024 Limits for Catch-Up Contributions?

Many retirement planning options, including 401(k) and 403(b) plans, allow participants to contribute funds on a pre-tax basis. These employer-sponsored plans can also allow post-tax (Roth) contributions, but they don’t have to. There’s also a maximum annual limit for combined contributions to 401(k), IRA and other plans. In 2023, that limit is $22,500, and it will increase to $23,000 in 2024.

However, older taxpayers can make catch-up contributions beyond the $23,000 limit. According to the IRS, a catch-up contribution is “an elective deferral made by a participant age 50 or older that exceeds a statutory limit, a plan-imposed limit or the actual deferral percentage (ADP) test limit for highly compensated employees.”

Catch-up contribution limitations for 2024 will remain unchanged at $7,500 for 401(k), 403(b), Thrift Savings Plans and most 457 plans. That means people over 50 can contribute up to $30,500 to these retirement plans. For IRAs not tied to a workplace plan, the limit remains $1,000, although it will be indexed to inflation and could increase in subsequent years.

How SECURE Act 2.0 Will Affect Higher Earners

A provision in the SECURE Act 2.0 law will affect how catch-up contributions are made for some higher-income earners age 50 or older. Beginning in 2026, people making more than $145,000 in the previous tax year will have to make catch-up contributions on a Roth basis, using after-tax money instead of pre-tax money.

This provision was due to take effect on Jan. 1, 2024. However, the IRS delayed the requirement by two years. Anyone in an eligible retirement plan, including these high-earning taxpayers, can make pre-tax catch-up contributions for the 2024 and 2025 tax years.

Another key change begins January 1, 2025, as individuals ages 60 to 63 can make catch-up contributions of up to $10,000 to a workplace plan each year, which will be indexed to inflation.

How Advisors Can Help Clients Navigate Catch-Up Contributions

Financial advisors can play a crucial role in helping clients navigate changes to catch-up contributions enacted through the SECURE Act 2.0. The first step is working with clients to understand the particulars of their workplace plan and what options are available.

For example, some employer-sponsored retirement plans don’t allow post-tax Roth contributions. Those plans would have to adjust their policies to accommodate high earners over 50, or else they will effectively lock out such employees from making catch-up contributions starting in 2026.

Financial advisors should work with clients over 50 to discuss their expected earnings starting in the 2026 tax year, as well as their current portfolio and tax goals. If making catch-up contributions is a priority, post-tax Roth contributions might still be worth it. Additionally, paying taxes on that income now, as opposed to paying taxes during 401(k) withdrawals, could be advantageous if clients anticipate being in a higher tax bracket during retirement.

For clients who are further from retirement, advisors can highlight the importance of automatic enrollment and automatic plan portability. Beginning in 2025, many employers must automatically enroll eligible employees in 401(k) and 403(b) plans, starting at a contribution rate of at least 3% in 2025. Inform clients of the advantages of automatic plan portability, which facilitates the transfer of low-balance retirement accounts to a new plan when changing jobs. Early retirement plan participation could stave off the need to make catch-up contributions later in life.