IRS Proposes Key Updates to Catch-Up Contributions for Retirement Plans

Internal Revenue Service (IRS) building in Washington on Oct. 16, 2023. Madalina Vasiliu/The Epoch Times

The IRS has proposed new rules for catch-up contributions, which are extra contributions to 401(k) or similar retirement plans for employees aged 50 or older.

Announced on Jan. 10, the proposed regulations aim to clarify how statutory changes introduced by the SECURE 2.0 Act should be implemented. With the proposal, the agency is also seeking to address public feedback received in response to an earlier notice, which provided initial guidance on catch-up contribution requirements.

The proposed rules introduce several key updates to the Internal Revenue Code (IRC) that are intended to improve retirement savings options and ensure compliance with the SECURE 2.0 Act.

Starting in 2026, employees earning more than $145,000 annually will be required to make their catch-up contributions as after-tax Roth contributions. While these contributions will not reduce taxable income in the year they are made, they will grow tax-free, and withdrawals during retirement will not be taxed. This change applies to employees aged 50 or older who participate in 401(k), 403(b), or similar retirement plans.

Until the Roth requirement takes effect in 2026, all eligible employees aged 50 or older, regardless of income, will still be able to make catch-up contributions under the existing rules.

Starting in 2025, employees aged 60 to 63 will be allowed to contribute up to 150 percent of the standard catch-up limit, boosting savings opportunities during the critical pre-retirement years. For example, with the current standard catch-up limit of $7,500, this enhancement would allow contributions of up to $11,250 for employees in this age group.

The proposed rules also increase catch-up contribution limits for SIMPLE plans, which are retirement savings plans tailored for small businesses. Employees aged 60 to 63 participating in these plans will be eligible for an enhanced catch-up contribution limit of 150 percent of the current SIMPLE plan limit. For example, with the current SIMPLE catch-up limit of $3,500, the new limit for this group would be $5,250.

All contribution limits, including the income threshold for the Roth requirement and the enhanced limits for participants aged 60 to 63, will be adjusted annually for inflation to reflect changes in the cost of living.

The IRS will open a 60-day public comment period on the new rules beginning on Jan. 13, the date the proposal is expected to be published in the Federal Register. The agency is particularly seeking feedback on how the proposed regulations might affect smaller entities.

In addition, the IRS has scheduled a public hearing on the proposal for April 7, 2025, offering an opportunity for stakeholders to provide further input on the rules.