The new catch-up requirements are set to take effect after 2023. Many retirement plan sponsors have found it challenging to implement the appropriate processes and procedures to comply. The IRS recently offered guidance on retirement catch-up contribution rules in response to taxpayer worries. Notice 2023-62 extends the deadline and fixes a bug in SECURE 2.0. The hope is to alleviate some confusion regarding the continued availability of catch-up contributions for employees.

IRS guidance on retirement

The IRS acknowledges the issues with the new regulation’s initial effective date in Notice 2023-62. In response, it has established an “administrative transition period,” pushing the start date of the extension to January 1, 2026. In other words, employers are not violating SECURE 2.0 if they permit catch-up contributions that aren’t classified as Roth contributions after December 31, 2023, and up until January 1, 2026. Furthermore, designs lacking Roth characteristics can permit catch-up contributions at this time.

The advice also clarifies a wording mistake in SECURE 2.0 that raised doubts about whether the law prohibited taxpayers from making catch-up contributions after 2023. According to the IRS, participants in plans who are 50 or older may still make catch-up payments through 2024 and beyond.

After-tax vs. pre-tax

While after-tax contributions grow tax-free, pre-tax contributions lower your current-year taxable income. If you anticipate paying a higher income tax rate in retirement than you did when you made your contributions, this is a considerable benefit.

If you’ve owned the account for at least five years, you can often withdraw “qualified distributions” without paying taxes. Distributions made due to a disability at death, after death, or after the age of 59 1/2 are considered qualified distributions.

Additionally, you might benefit from after-tax donations in other ways. For example, suppose you have less taxable income in retirement. In that case, you may pay less in Medicare premiums and less tax on your Social Security benefits.

However, there may be situations in which you can use pre-tax contributions to lower your current taxable income. The amount of your Child Tax Credit, which phases out at specific income limits, and the amount of financial aid your children can receive for further education could increase, for instance.

Note: Just like traditional 401(k)s, Roth 401(k) contributions are now subject to yearly required minimum distributions (RMDs). However, starting in 2024, designated Roth 401(k) contributions will not be subject to RMDs until the owner’s passing.

Potential future guidance

Additionally, the IRS used Notice 2023-62 to provide a sneak peek at some new Section 603 guidance “under consideration.” The IRS indicated it is considering issuing future guidelines about multi-employer plans and other unusual circumstances after considering any feedback received. Contact RRBB Advisors if you have any questions. For more information, visit part one of this blog series.