The Consolidated Appropriations Act of 2023 included several changes to retirement plans that were included in another bill known as SECURE 2.0. Those changes are still commonly referred to SECURE 2.0 even though the specific bill never actually became law. There were several significant changes that I wrote about here. But there were a few that were somewhat under the radar and may affect you in unanticipated ways. Let’s take a look.
Secure 2.0 gives you the option to choose to have your matching contributions in your 401(k), 403(b), 457 or TSP to a Roth account (if your employer offers Roth as an option). Cool. You don’t have to pay taxes when you take those funds, and the earnings on them, out of the account. True that. But you do have to pay taxes on the funds when they’re contributed to your account (401(k), 403(b), 457, TSP). There is no indication that there will be any withholding on those contributions, and it doesn’t make sense that there would be. So…if you don’t adjust your withholding another way, you may owe when you file and if you owe too much you could get hit with an under-withholding/failure to pay penalty. Forewarned is Forearmed.
The Internal Revenue Code (IRC) allows you to contribute an additional amount to your employer sponsored plans (401(k), 403(b), 457, TSP) when you turn 50 years old. Currently the amount of the catch-up is $7,500. SECURE 2.0 tinkered with catch-up contributions. If you earned more than $145,000 (inflation adjusted) from the plan sponsor (your employer) the previous year, your catch-up contributions must be made to a Roth Account. If you’re in the 22% tax bracket that is a tax increase of $1,650 and at 37% it is a tax increase of $2,775...plus state income taxes if they apply (remember when the President said no one earning less than $400,000 would see their taxes go up?). A couple of things to note:
- This doesn’t apply to IRAs
- If you change jobs, you may get a year or two of reprise since you have a new employer and he or she wasn’t your employer last year
- It doesn’t appear that this rule applies to self-employed individuals’ retirement accounts
No Catch-up Contributions at All
Employers are not required to offer Roth options in retirement plans. If that is the case how are the catch-up contributions described above done? They’re not. Secure 2.0 says that if individuals that are required to make catch-up contributions to a Roth account can’t because one doesn’t exist, then no one can make catch-up contributions regardless of their income. That’s nice, huh?
A Couple of Details
Roth matching is available immediately. The Roth catch-up requirement goes into effect in 2024, but there are some predicting it will take some time for plan administrators to get processes into place. Some argue that the law can’t be enforced as the government can’t require you to invest a certain way (not sure I’m buying that argument).
Military Finances are Different
While SECURE 2.0 applies to all Americans equally that isn't always the case. There are several areas in the tax code that treat Active and Retired Senior Military Officers and NCOs differently. There also benefits available to you that aren't available to your civilian counterparts. That's why we think you should work with a Financial Planner/Advisor that deals with your issues every day. If you'd like to find out how we do things, use the button below to schedule a free initial consultation.
If you found this article useful, you might like the following blog posts.