Are you looking to catch up on saving for retirement?

If you are 50 or older and worried about having enough money saved for retirement, you need to learn about catch-up contributions. First, let's talk about 2023; then, we'll address changes coming in 2024 and 2025.

Catch-up contributions are extra funds you can contribute to your retirement account when you are 50 or older (tinyurl.com/48dhafrf).

For 2023, the catch-up contributions for 401(k)s and 403(b)s (defined contribution plans) can be up to $7,500. If you want to maximize your contribution for the year, adding $7,500 to $22,500 (the maximum contribution for 2023) will bring you up to $30,000 that you can contribute to your 401(k) plan at work in 2023.

The catch-up contribution for an IRA in 2023 is $1,000, although that amount will be indexed to inflation starting in 2024. The maximum you can contribute to an IRA with the catch-up is $7,500 ($6,500 plus the $1,000 catch-up if you are 50 or older).

To stay on top of things going forward, keep in mind that you need to check yearly cost-of-living adjustments for both regular contributions and catch-up contributions. There are also yearly limits for the total amount that is contributed (tinyurl.com/2hvetkev).

Keep in mind that there are also limits to the amount an employer can contribute.

The 401(k) limit for an individual of any age for all contributions (including the employee's and the employer's) is $66,000 in 2023 (or 100% of a participant's compensation, whichever is less).

For an individual age 50 or older, the catch-up contribution increases the $66,000 maximum to $73,500 for 2023.

At the moment, catch-ups can be directed to pre-tax or Roth 401(k)s, if the plan provides for after-tax contributions -- not all do. But, starting in 2024, high earners will be constrained.

Section 603 of SECURE Act 2.0 requires catch-up contributions for high earners (income of more than $145,000 in the previous year) to be designated as post-tax Roth contributions, not as pre-tax contributions.

That means there is less freedom for you, the high-earning participant, to make a choice. Congress has taken that away from you, starting in 2024. If you are a high earner, your catch-up will be after-tax. (A lower earner is still free to choose.)

Pre-tax contributions lower your taxable income by the amount of the contribution. After-tax contributions do not.

However, after-tax contributions will grow tax-free forever (unless Congress has other ideas someday in the future).

An estimated 16% of the eligible participants in Vanguard defined contribution plans made catch-up contributions in 2022, including about half of the participants who had income over $150,000, according to Vanguard's "How America Saves 2023" report (tinyurl.com/342yx7wh).

About 200 organizations signed a letter in July to the leaders of the House Committee on Ways and Means and the Senate Committee on Finance asking that the Roth catch-up requirement in Section 603 involving the $145,000 threshold be delayed for two years so that plan recordkeeping and compliance systems could accommodate the change (tinyurl.com/3a8rx525).

The issue was addressed on Aug. 25, 2023, through Notice 2023-62 (tinyurl.com/39jjufm7). The notice indicated that "the first two taxable years beginning after December 31, 2023, will be regarded as an administrative transition period" related to the Roth catch-up requirement and the $145,000 threshold, adding that during that time, catch-up contributions will be treated as satisfying requirements even if they are not designated as Roth contributions, and a plan that does not provide for designated Roth contributions will still be treated as satisfying requirements.

Further guidance from the IRS is expected. "The Treasury Department and the IRS intend to issue further guidance to assist taxpayers with the implementation of section 603 of the SECURE 2.0 Act," quoting Notice 2023-62.

Now is a good time to talk to your tax adviser to address additional funding for your future retirement.

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Last week, we discussed the reduction of the excise tax (penalty) for failure to take a required minimum distribution, or RMD, from 50% of the minimum amount not distributed to 25%. That change came about as a result of the SECURE 2.0 Act, effective beginning this year, 2023.

We left the discussion of the SECURE 2.0 Act's limited-case reduction to 10% for this column.

The statute provides for a 10% penalty, but it is dependent on timing the correction properly. The 25% penalty is reduced to 10% if the RMD is "timely corrected," quoting the IRS website (tinyurl.com/yfwcubn4).

IRS Publication 590-B (tinyurl.com/yc6tx8dh) defines the correction window:

"You may be subject to a reduced excise tax rate of 10% of the amount not distributed, if, during the correction window, you take a distribution of the amount on which the tax is due and submit a tax return reflecting this excise tax. The 'correction window' is the period of time beginning on the date on which the excise tax is imposed on the distribution shortfall and ends on the earliest of the following dates:

-- The date of mailing the deficiency notice with respect to the imposition of this tax; or

-- The date the tax is assessed; or

-- The last day of the second taxable year that begins after the date of the taxable year in which the excise tax is imposed."

While this seems complicated, it isn't.

Let's take an example. Assume you miss your 2023 RMD. The "second taxable year" would be the 2025 tax year. If you don't get a deficiency notice or a tax assessment from the IRS before Dec. 31, 2025, the correction window closes Dec. 31, 2025. The RMD for 2023 would need to be taken before the end of tax year 2025.

As for when the excise tax is "imposed," an IRS spokesperson explained, "The tax is legally imposed in the year there is a shortfall." That is, if the RMD is for 2023, the tax return you file in 2024 for 2023 will deal with the imposition of the penalty.

Further, when there is an RMD shortfall, "[t]he tax is due for the tax year that includes the last day by which the minimum required distribution must be taken," quoting the instructions for IRS Form 5329, "Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts" (tinyurl.com/mv72yhhs).

The SECURE 2.0 Act did not address requests for waivers of the penalty for "reasonable cause." With a waiver, the penalty would be zero instead of 25% or 10%.

You would file IRS Form 5329 to request a penalty waiver. Under current procedures, the IRS can waive all or part of the excise tax if "any shortfall in the amount of distributions was due to reasonable error and you are taking reasonable steps to remedy the shortfall." See the "Waiver of tax for reasonable cause" section in IRS Form 5329, Part IX.

Keep in mind the motivation behind the change in the excise tax for missed RMDs in the SECURE 2.0 Act, as expressed by the House of Representatives' Committee on Ways and Means: "The Committee recognizes that in many cases, failures to take a required minimum distribution are inadvertent. The Committee thus wishes to reduce the overall excise tax that applies to such failures, in particular in the case of an individual who discovers such a failure and takes steps to correct it" (tinyurl.com/9bprn8fn).

Regarding the 10% penalty and its two-year correction window, the IRS spokesperson noted, "In many respects, it is a somewhat unusual statutory provision." He added that the SECURE 2.0 Act is new, and the IRS is "looking at what formal legal guidance may be needed."

For more information on the penalty, read Q8 on the IRS website page "Retirement Plan and IRA Required Minimum Distributions FAQs" (tinyurl.com/yfwcubn4).

Bottom line: Take your RMDs on time. If you miss one or fail to take the full RMD, act as quickly as possible to make up the difference. And be sure to inform your tax adviser.

DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION

If you are a regular reader, you'll know that when I discuss IRAs or 401(k)s or taxes generally, I'll remind you that you need to review your situation with your tax adviser. It's hard to generalize about taxes, since your tax return is unique to you. Plus, tax rules continue to change.

For example, for as long as I can recall, I've been warning you about the excise tax (penalty) on insufficient required minimum distributions, or RMDs. That's the tax that penalizes you if you don't withdraw the proper amount each year from your tax-deferred retirement accounts after you reach a certain age -- or if you inherit a retirement account at any age.

So, here we are, with a major change in the rules that affects us all starting right now. Thanks to SECURE Act 2.0, which was signed into law at the end of 2022, the penalty for failing to take enough money out of your tax-deferred IRA is now set at a rate of 25%, reduced from 50%.

"Even at 25%, it is still a significant penalty, warranting care to comply with RMD requirements," said Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting.

This is how the IRS points out the change on the IRS website (read the quote to the end):

"If an account owner fails to withdraw the full amount of the RMD by the due date, the amount not withdrawn is subject to a 50% excise tax," quoting the IRS website (tinyurl.com/yfwcubn4). "SECURE 2.0 Act drops the excise tax rate to 25%."

The 2023 formula works this way:

Jim, age 75, forgets to take any of his RMD in 2023 by the Dec. 31 deadline. His penalty is 25% (not 50%) of the RMD. For example, if his RMD was to be $20,000, he would owe the U.S. Treasury an excise tax of $5,000 -- still a large amount, but only half of the amount ($10,000) he would have owed under the pre-SECURE Act 2.0 rules.

Again, that's still a hefty penalty, but only one-half of what it was before SECURE Act 2.0's change. The change is a big deal. And, here's why our legislators made this happen.

According to a March 29, 2022 report from the House of Representatives' Committee on Ways and Means (tinyurl.com/9bprn8fn), under Reasons for Change for the RMD excise tax:

"The Committee recognizes that in many cases, failures to take a required minimum distribution are inadvertent. The Committee thus wishes to reduce the overall excise tax that applies to such failures, in particular in the case of an individual who discovers such a failure and takes steps to correct it."

One open issue is whether the IRS will be amenable to requests for waiver of the penalty.

"With the 50% penalty, the IRS had been willing to waive the penalty for a showing of reasonable cause for noncompliance and taking corrective action to come into compliance," explained Luscombe. "There was some concern that, with a lower penalty, the IRS might be less willing to waive penalties. However, in updating its frequently asked questions on required minimum distributions, the IRS left the waiver of penalty question, question 9, intact, indicating that the IRS probably plans to continue its waiver program in a manner similar to what was done in the past."

These frequently asked questions can be found on the IRS website at "Retirement Plan and IRA Required Minimum Distributions FAQs" (tinyurl.com/yfwcubn4).

The waiver Luscombe refers to involves Form 5329, "Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts." A taxpayer can request a waiver of an excise tax by showing "reasonable cause" for why the RMD was not taken by the due date. More details can be found in the instructions for Form 5329 (tinyurl.com/2p8p7cwj).

Note that Form 5329 and its instructions for the 2023 tax year, the first involving the new 25% penalty, are not out yet, according to an IRS spokesperson.

Next week, we'll talk about another SECURE Act 2.0 change that reduces the 25% penalty to 10% in limited cases.

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