- Currently, “catch-up contributions” allow savers age 50 and older to transfer additional money to their 401(k) and other retirement plans beyond the employee deferral limit.
- The change through Secure 2.0 would have eliminated the tax credit for higher earners by only allowing such deposits in Roth accounts after taxes, starting in 2024.
- However, the IRS on Friday announced a two-year delay to this change, which means savers can still make pretax contributions through 2025, regardless of income.
Terry Fine | Getty Images
Top earners who max out their retirement savings now have more time for pretax 401(k) contributions, thanks to new IRS guidance.
Currently, “catch-up contributions” allow savers age 50 and older to transfer an additional $7,500 to 401(k) and other retirement plans beyond the $22,500 employee deferral limit for 2023.
A change made through Secure 2.0 would have eliminated the tax credit offered on catch-up contributions For higher earners by allowing only these deposits in after-tax Roth accounts, starting in 2024.
But the IRS on Friday announce A two-year delay to the change, which means savers can still make pre-tax contributions through 2025, regardless of income.
“The administrative transition period will help taxpayers smoothly transition to the new Roth catch-up requirements,” the IRS said in a statement.
The Secure 2.0 change applies to employees making deposits to 401(k), 403(b), or 457(b) plans who received more than $145,000 from a single company in the previous year.
About 16% of eligible employees have benefited from catch-up contributions in 2022, according to the latest reports. Vanguard report Based on nearly 1,700 retirement plans.
Dan Galle, a certified financial planner in Norwell, Mass., and owner of Daniel J. Galle & Associates, said the delay is “a very good thing” for retirement plan administrators.
“There’s no way to do it right without two years of preparation,” he added.
There is no way to do it right without a few years of preparation.
Dan Galli
Owner Daniel G. Galle & Associates
About 200 organizations wrote a letter The United States submitted a request to Congress in July asking for more time to implement the 401(k) changes, and many have applauded the delay.
Diane Howland, vice president of legislative affairs for the American Benefits Board, said in a statement Friday that pension plan sponsors are grateful for the agency’s “critical relief.”
“Without this additional compliance period, many plans and employers would not be able to comply with the new requirements and would likely have to suspend compensatory retirement contributions,” she said.
Galli said that while higher earners now have an additional two years for pretax 401(k) contributions, some may still be considering after-tax deposits with impending changes to the income tax law.
“This coincides nicely with the variable tax brackets coming in 2026,” he said. Many provisions of the Tax Cuts and Jobs Act, including lower individual tax rates, will be terminated after 2025 without congressional intervention.
While pre-tax 401(k) contributions provide upfront tax relief, after-tax Roth deposits allow the money to grow and be withdrawn in tax-exempt retirement. With potential tax increases on the horizon, it may make more sense for some investors to pay taxes now.
“What we’re doing with clients now is trying to take advantage of the lower tax brackets for as long as possible,” Galli said.
“Infuriatingly humble alcohol fanatic. Unapologetic beer practitioner. Analyst.”