How SECURE 2.0 changes RMDs, catch-up contributions, and Roth
[Updated; original publish date 3/31/23] Preretirees and retirees were among the many populations targeted by SECURE 2.0 provisions. The act uses two key elements of qualified plans—required minimum distributions and catch-up contributions—to make it easier for these groups to keep their savings invested and to help build their retirement savings. But, as often happens, one of the provisions requires some clarification, while others impose new rules for plans to administer.
RMD changes ease up on preretirees
There are two provisions of SECURE 2.0 that make changes to required minimum distributions (RMDs)—easing the requirements for the early years of retirement and aligning RMD rules in workplace retirement plans and IRAs.
Section 107: increased RMD age
Section 107: increased RMD age
Effective date: For distributions required to be made after December 31, 2022, with respect to individuals who attain age 72 after such date
Under the SECURE Act of 2019, the RMD age was increased from 70½ to 72 for employees born after June 30, 1949. Section 107 of SECURE 2.0 further increased the RMD age to 73 for employees born after December 31, 1950, and before January 1, 1960, and then increased to age 75 for employees born after December 31, 1958.
There is a technical glitch in this provision as employees born during 1959 are subject to both age 73 and age 75. We expect to see guidance that clarifies which RMD age applies to such employees.
John Hancock point of view
Increasing the RMD age delays the RMD start date, which means that funds may continue to grow in a retirement account for a longer period and, in turn, helps enable retirees to improve their financial future.
Section 325: exemption of pre-death RMDs from Roth accounts
Section 325: exemption of pre-death RMDs from Roth accounts
Effective date: For taxable years beginning after December 31, 2023 (doesn’t apply to distributions that are required with respect to years beginning before January 1, 2024, but are permitted to be paid on or after such date)
This provision provides an exemption of Roth amounts in employer retirement plans from pre-death RMDs. This change aligns the RMD rules for Roth amounts under employer retirement plans with the Roth IRA RMD rules.
John Hancock point of view
Now that the rules will be the same for employer retirement plans and Roth IRAs, participants will be able to evaluate whether it makes financial sense to roll over their retirement plan account to their IRA or Roth IRA without having to consider inequitable RMD rules.
There are advantages and disadvantages to all rollover options. Participants are encouraged to review their options to determine if staying in a retirement plan, rolling over to an IRA, or another option is best.
More catch-ups for preretirees and more rules for plan sponsors
As with raising the RMD age, SECURE 2.0’s changes to the catch-up limits are meant to help people build more retirement savings. But the new rules for catch-up contributions and Roth will require additional payroll tracking for sponsors, payroll providers, and recordkeepers, and they’ve already prompted requests for clarification and guidance.
Section 109: higher catch-up limit to apply for ages 60-63
Section 109: higher catch-up limit to apply for ages 60-63
Effective date: For taxable years beginning after December 31, 2024
The catch-up contribution limit for 401(k), 403(b), and governmental 457(b) plans has been increased for individuals who attain ages 60 through 63 to the greater of $10,000 or 150% of the regular catch-up contribution limit for 2024 (indexed for inflation). The catch-up contribution limit for people aged 50 and older is $7,500 in 2023.
For SIMPLE plans, individuals 60 through 63 years old will be able to make catch-up contributions up to the greater of $5,000 or 150% of the regular catch-up contribution limit in 2025 (indexed for inflation). The catch-up contribution limit for people aged 50 and older is $3,500 in 2023.
John Hancock point of view
This provision provides participants who delayed or haven’t started saving for retirement a better chance to catch up and bolster their savings before reaching retirement age.
Section 603: catch-up contributions must be made on a Roth basis
Section 603: catch-up contributions must be made on a Roth basis
[Update] On August 25, 2023, the IRS released guidance on the effective date for Section 603. This new guidance delays until December 31, 2025, the mandate for catch-up contributions to be made on a Roth basis for participants earning more than $145,000.
[Original provision] For taxable years beginning after December 31, 2023
This provision requires that catch-up contributions under an employer retirement plan (other than a SIMPLE IRA or simplified employee pension plan) be made on a Roth basis for participants who had compensation that exceeded $145,000 in the prior calendar year (indexed for inflation). Any other participant must be permitted (but not required) to elect to have catch-up contributions made on a Roth basis. This means that plans that don’t permit designated Roth contributions can’t permit catch-up contributions.
John Hancock point of view
This provision will need to be monitored by payroll providers to track whether a participant’s prior year compensation exceeded the threshold. Recordkeepers may not have compensation records to administer this provision in a timely manner, especially for plans with off-calendar plan years.
Answering questions about the changes to catch-up contributions and Roth
Q1 When does a catch-up-eligible participant first become eligible for the increased catch-up limit?
Q1 When does a catch-up-eligible participant first become eligible for the increased catch-up limit?
A catch-up-eligible participant who turns age 60 by the end of the year is eligible to make a catch-up contribution up to the increased catch-up limit. The participant can also continue to make an increased catch-up contribution at ages 61 through 63.
Example: The participant is age 59 at the start of 2025 but turns age 60 on December 31, 2025. The participant would be eligible to make an increased catch-up contribution in 2025 and continue increased catch-up contributions at ages 61 through 63.
Q2 Is the higher catch-up limit at ages 60 through 63 available for everyone or do income limitations apply?
Q2 Is the higher catch-up limit at ages 60 through 63 available for everyone or do income limitations apply?
It’s available to all participants ages 60 through 63 (with no income limitations) provided the plan has a catch-up contribution provision. However, if a participant has wages in excess of $145,000 for the prior year, all catch-up contributions must be designated as Roth contributions pursuant to Section 603 of SECURE 2.0.
Q3 How do the regular catch-up limits and increased catch-up limits work for employees who attain the applicable catch-up age by the end of the taxable year?
Q3 How do the regular catch-up limits and increased catch-up limits work for employees who attain the applicable catch-up age by the end of the taxable year?
Age 50–59: Regular catch-up limit in effect for the applicable year
Age 60–63: Greater of $10,000 or 150% of regular catch-up limit in effect for 2024, indexed
Age 64 and older: Regular catch-up limit in effect for the applicable year
Q4 Is an employer required to offer the increased catch-up limit for employees at ages 60 through 63?
Q4 Is an employer required to offer the increased catch-up limit for employees at ages 60 through 63?
The increased catch-up limit for eligible participants (ages 60–63) is built into IRC Section 414(v) under SECURE 2.0, which most preapproved plan documents incorporated by reference.
Q5 Will a plan have to add a Roth feature in order to have a catch-up contribution provision?
Q5 Will a plan have to add a Roth feature in order to have a catch-up contribution provision?
Yes, it appears a plan will have to add a Roth feature if it has participants who receive wages that are greater than $145,000 (indexed).
Q6 How is the $145,000 income threshold determined?
Q6 How is the $145,000 income threshold determined?
The threshold is based on wages under IRC Section 3121(a) earned during the prior calendar year from the employer sponsoring the plan.
There is current uncertainty about what this means for partners and sole proprietors who don’t receive wages under IRC Section 3121(a). Guidance has been requested.
Q7 Can plans limit the availability for participants to elect Roth or pretax only for catch-up contributions (with the exception for participants with wages over the $145,000 wage threshold) and limit all other salary deferrals to pretax?
Q7 Can plans limit the availability for participants to elect Roth or pretax only for catch-up contributions (with the exception for participants with wages over the $145,000 wage threshold) and limit all other salary deferrals to pretax?
It’s unclear, but it appears this would be permissible.
Q8 Can a plan require that all catch-up contributions be made as Roth contributions?
Q8 Can a plan require that all catch-up contributions be made as Roth contributions?
It’s unclear, but it appears that this wouldn’t be permissible.
Help for retirement savers plus the devil in the details
Preretirees and retirees received some welcome assistance with raised ages to begin RMDs and expanded catch-up limits to help them save more. And though some aspects of SECURE 2.0 are very clear, the retirement industry eagerly awaits guidance and further clarification of many sections of Secure 2.0. Consider working with a trusted financial professional as you determine what SECURE 2.0 means for your plan and participants. For more details on some of the act’s key provisions, please visit our SECURE 2.0 webpage and download our white paper.
Important disclosures
The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made.
John Hancock Retirement Plan Services LLC offers administrative and/or recordkeeping services to sponsors and administrators of retirement plans. John Hancock Trust Company LLC provides trust and custodial services to such plans. Group annuity contracts and recordkeeping agreements are issued by John Hancock Life Insurance Company (U.S.A.), Boston, MA (not licensed in NY), and John Hancock Life Insurance Company of New York, Valhalla, NY. Product features and availability may differ by state. Securities are offered through John Hancock Distributors LLC, member FINRA, SIPC.
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