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Secure Act 2.0, the legislation passed at the end of last year that added retirement saving options has also a few potential catches. Knowing these potential pitfalls can help you to make smarter decisions or be better prepared.
In my previous column I discussed one of the changes, namely new exceptions for federal penalties of 10% on early withdrawals from retirement funds. In this article, I will cover the changes that Secure 2.0 has made to workplace plan matching and catch-up contribution amounts.
A Catch-up Provision That Could Be Problematic
Catch-up provisions allow older workers to contribute more money to retirement plans. People 50 years and older will be able to contribute $7,500 more in 2023 than the $22,500 standard limit.
The contributions that are made to a pre-tax plan can be deducted. Starting next year, those who make more than $145,000 will not be able to deduct their catch-up contributions into workplace retirement plans. The money will be transferred to the Roth plan. People earning under $145,000 can choose to make catch-up Roth contributions, without being required. )
Colleen C. Carcone is the director of Wealth Planning Strategies at TIAA Financial Services. She says that Roth withdrawals in retirement are tax free, and this can be a great benefit to savers. Roth contributions are often suggested for young workers who anticipate being in the same tax bracket or higher in retirement.
Many people find that their tax brackets decrease once they retire. For older workers, Roth contributions may not make sense because they will pay a higher rate of tax on contributions.
According to Carcone, many financial planners recommend that retirees put at least a small amount of money in a Roth account so they can control their taxes during retirement.
According to Olivia S. Mitchell of the Pension Research Council (which studies retirement issues), the loss of tax deductions could deter people from making catch up contributions.
There’s also another problem: not all workplace plans offer a Roth option. Collado says that if an employer does not add a Roth feature, then no one can make catch-up contribution.
Last-Minute Catchups
Workers aged 60 to 63 will be able to make larger contributions in the workplace retirement plan starting 2025. It will either be $10,000 or 150% the catch-up contribution cap. This $10,000 is adjusted for inflation annually. The lower contribution limits will again apply at age 64.
Roth contributions are only available to higher earners. The option must be available to lower earners. The $145,000 limit on income will be adjusted for inflation annually, and we do not yet know the exact amount. )
For those that can benefit from them, the higher limit could be beneficial. Many people are experiencing a decline in their income by the time that they reach 60, and may not be able to afford the additional cash. ProPublica’s and Urban Institute’s 2018 analysis of data found that over half of full-time workers in their 50s who are employed steadily, but not yet ready for retirement have been forced out before retiring. The vast majority of these people never recovered financially.
No one should delay saving for retirement, thinking that they will catch up at a later date, says certified public accountant Marianela Collado who is a member of the American Institute of CPAs personal financial planning executive council.
Collado: “The power of saving early in a career cannot be overstated.”
Matches between companies could cost you
Secure 2.0 continues to “Rothify” retirement plans, by allowing employers to match funds into workers’ Roth account.
At the moment, match funds are added to accounts that do not add to an employee’s income. While matching funds that are contributed to Roth accounts would not be taxed, they will.
It won’t apply to anyone. Collado says that employers are not required to provide this option and neither will employees be obligated to accept it. You should expect to pay more tax if you choose Roth matching funds.
Paying taxes in advance can be a good idea if you plan to retire in a tax bracket that is higher and are willing to pay the additional money.
Takeaways
The Secure 2.0 changes have added enough complexity that people should consider getting expert advice about whether they’re saving enough and in the right ways, Carcone says. Carcone says that the Secure 2.0 changes are so complex that it’s important to seek expert advice on whether you’re saving in the correct way and enough.
The Associated Press originally published this article, which was written by NerdWallet.