Congress has kept the CPA and financial advising world busy over the past several years, while at the same time inadvertently complicating the picture for average Americans attempting to navigate the changing landscape. Numerous pieces of tax legislation and spending packages have been passed, e.g., the Tax Cuts and Jobs Act, SECURE Act, CARES Act, Inflation Reduction Act, omnibus spending bills … the list goes on. Added to that list is the recently passed SECURE 2.0 Act, signed into law in late 2022. A good summary of the act is provided in our previous FORsights™ article, "What Does the SECURE 2.0 Act Mean for Retirement Strategies?" This current article is part of a series by FORVIS diving deeper into some of the act’s specific provisions.
Included in the recent legislation are changes to catch-up rules for retirement savers. It’s widely known that there are challenges facing aspiring retirees in America. Before we get to the good news, let’s first discuss some of the problems:
- Social Security: The Congressional Budget Office projects that the Social Security Old-Age and Survivors Insurance (OASI) Trust Fund, which provides benefits to retired workers, is estimated to be depleted in 2033. Barring any reforms to the Social Security system, future retirees may face the obstacle of reduced benefits in retirement.
- Pensions: A common supplement to Social Security used to be employer-funded pensions, or what are sometimes referred to as defined benefit plans. Workers were promised a certain benefit in retirement based on multiple factors, including salary and years of employment. The employer was responsible for making sure the pension fund was managed in a competent manner and was ultimately on the hook for any shortfalls. Though some employers continue to offer a pension benefit to workers, particularly in public sector spaces such as education or healthcare, traditional pension plans are now largely a thing of the past.
- Savings Issues: As defined benefit pension plans have gone by the wayside, the responsibility of saving for retirement has shifted from the employer to the employee. This is largely through the use of defined contribution plans, which include 401(k)s, 403(b)s, and other similar retirement plans. Under these plans, it’s now on the individual employee to decide how much to save, which tax vehicle they should be saving into, i.e., pretax versus Roth, and how to invest their savings. According to recent data from the Federal Reserve, approximately 25% of non-retired adults have no retirement savings set aside at all and only 40% of non-retirees thought their retirement was on track.
Congress has recognized the issues facing future retirees in America, and both the SECURE Act (passed in December 2019) and SECURE 2.0 Act were intended to help fix some of these issues. As part of that effort, Congress has expanded some of the rules related to what are known as “catch-up” provisions. As a bit of background, for 2023, the IRS allows individuals to save up to $22,500 into a retirement plan and $6,500 into an individual retirement account (IRA), subject to some restrictions. Employees age 50 and older are eligible to save an additional “catch-up” amount of $7,500 into their retirement plan and $1,000 into their IRA.
Inflation Adjustment for IRA Catch-Up Contributions: Historically, deferral amounts and catch-up provisions for retirement plans were adjusted for inflation in increments of $500. When it came to IRAs, contribution limits were indexed for inflation, but catch-up provisions were not. The SECURE Act 2.0 remedies this situation by adjusting IRA catch-up provisions for inflation in increments of $100, beginning in 2024.
Increased Catch-Up Contributions for Employer-Sponsored Plans: Beginning in 2025, retirement plan participants who are age 60 through 63 will have their plan catch-up limit increased to the greater of $10,000 or 150% of the previous year’s catch-up contribution limit.
Each of these changes to catch-up provisions will allow for approaching retirees to save additional tax-advantaged monies into their retirement plan and/or IRA. While there are still issues to be resolved, notably surrounding employee education and reforms to Social Security, these recent changes are welcome news to the industry and future retirees.
What adjustments may be appropriate to your personal retirement savings are based on a wide range of factors and should be part of a larger conversation about how best to meet your short- and long-term goals. FORVIS Private Client™ is here to provide valuable guidance in an ever-changing tax landscape. If you have questions or need assistance, please reach out to a professional at FORVIS or submit the Contact Us form.