SECURE 2.0 to increase catch-up contributions, raise RMD age

Among a host of other changes, SECURE 2.0 will increase the limits for catch-up contributions and raise the required minimum distribution age, allowing older adults to save more and for longer, experts say.

The changes are just a few of more than 90 provisions in the bipartisan retirement security package, which Congress passed in December as part of a year-end spending bill.

Currently, individuals over 50 can make catch-up contributions of up to $7,500 in their 401(k) plans, as well as most 403(b) and 457(b) plans. Under SECURE 2.0, starting in 2025, individuals aged 60 to 63 will be able to make catch-up contributions of $10,000 or 50% more than the regular catch-up amount in 2025 — whichever is greater. The increased amounts will also be indexed for inflation after 2025.

On Tuesday, two industry trade groups sent letters to the Treasury Department to propose a fix for the widely reported drafting error in SECURE 2.0 that mistakenly prevents participants in 401(k), 403(b) and 457(b) plans from making catch-up contributions, whether Roth or pretax, beginning in 2024.

"I think the idea behind catch-up contributions has always been … an attempt to recognize that when people are younger, or earlier in their careers, they may have less potential to save, and they can get into a deficit," said Michael Kreps, principal and co-chair of retirement services at Groom Law Group.

But once people enter their 50s and 60s, he said, they often "free up" income and become more focused on saving as they approach retirement. Catch-up contributions allow them to put more money in the plan, Mr. Kreps said.

The benefits of this "are mitigated a bit" by another SECURE 2.0 provision, Mr. Kreps noted, which requires that all qualified catch-up contributions are subject to Roth tax treatment starting in 2024, though there is an exception for employees making $145,000 or less.

Since the increase in catch-up contributions only applies to those ages 60 to 63, record keepers will need to build infrastructure to automate the age tracking, Mr. Kreps added.

SECURE 2.0 also raises the catch-up contribution limit for SIMPLE IRA plans by 10% for employers with no more than 25 employees starting in 2024. An employer with 26 to 100 employees will be allowed to offer the same increase as long as they provide a 4% matching contribution or 3% employer contribution.

Separately, SECURE 2.0 raises the RMD age to 73, starting this year, and will raise it further to 75, starting in 2033. This builds on the SECURE Act of 2019, which raised the RMD age to 72.

"Like the RMD increase in the 2019 law, this additional increase will allow retirees the option to keep their money invested longer so that it continues to grow until they need it," said Andy Blocker, global head of public policy and head of U.S. government affairs for Invesco, in an email.

Mr. Kreps said the RMD increase will benefit "people that have material retirement savings and can delay taking that out."

He added that the provision is mostly meant to help individuals, as plan sponsors differ in their views on whether it's beneficial for participants to stay in the plan after they retire. While many plan sponsors are "paternalistic" and find post-retirement participation helpful, others are more "risk-averse," he said, and fear that more money in the plan means a higher risk of a lawsuit.

Ultimately, "there has been a lot of work over the past maybe 15 years to get more money into the retirement system," Mr. Kreps said. He also highlighted the saver's match, auto portability provision and emergency savings provisions within SECURE 2.0 as helping participants save more and for longer.