Recently, there’s been concern over planned changes to rules governing catch-up contributions for 401(k) plans. The changes, which initially weren’t going to be effective until 2024, will require catch-up contributions for higher-income earners to be made on a Roth basis. (Making catch-up contributions on an after-tax Roth basis means paying taxes on your retirement savings during the years when you usually earn more.)
Under SECURE 2.0, if you are at least 50 and earned $145,000 or more in the previous year, you can make catch-up contributions to your employer-sponsored 401(k) account. But you would have to make those extra contributions on a Roth basis, using after-tax money.
- You couldn’t get tax deductions on those catch-up contributions as you would with typical 401(k) contributions, but you could withdraw the money tax-free when you retire.
- The SECURE 2.0 Roth catch-up contribution rule won’t apply to taxpayers making $144,999 or less in a tax year.
Roth catch-up contributions glitch
While the new rule may seem reasonable, more clarity with implementing Roth catch-up contributions for 2024 was needed. When lawmakers drafted the Roth catch-up provisions of SECURE 2.0, they mistakenly left out specific language. As a result, under the current text of SECURE 2.0, no participant could make catch-up contributions (whether on a pre-tax or Roth basis).
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Also, as Kiplinger reported, hundreds of employers, plan sponsors, and organizations expressed concern that the new 401(k) contributions rule wouldn’t be able to be implemented by next year. Over 200 entities made up of Fortune 500 companies, firms, and public employers, including the American Retirement Association, Chipotle Mexican Grill, Fidelity Investments, Charles Schwab, Microsoft Corporation, and Delta Airlines, asked Congress for a two-year delay to the Roth catch-up rule to 2026.
A key reason is that new payroll systems and administrative work will be needed, which many employers feared couldn’t be implemented to allow participants to make Roth catch-up contributions next year.
IRS offers more time to prep for Roth catch-up contributions
However, in late August, the IRS announced relief for high earners subject to the rule, which is also welcome news for many plan sponsors and employers. The agency says Roth catch-up contributions for high earners age 50 or over won’t be required until 2026. (That’s a two-year delay of the new rule.)
The IRS also clarified that plan participants aged 50 or older can make pre-tax catch-up contributions in 2023 despite their income level.
What does this mean? If you’re at least 50 years old or older, no matter your income level, you can continue to make catch-up contributions on a pre-tax basis through your employer-sponsored retirement plan. However, according to the IRS, those catch-up contributions will eventually (in 2026), have to be made on a Roth basis if your income meets or exceeds the $145,000 threshold.
So, it’s still a good idea to start planning now and consult a trusted tax professional to determine the best way to maximize your retirement savings.
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