An “administrative transition period,” announced by the IRS, extends the new requirement that catch-up contributions made by higher-income individuals participating in a 401(k) or similar retirement plan be treated as after-tax Roth contributions. The change delays the implementation of a rule that Congress approved last year as part of the Secure 2.0 Act (the Act)—which became law in December 2022.
Why the Change Is Needed
Prior to the passing of the Act, individuals aged 50 and older were permitted to make catch-up contributions into their retirement plans above the basic contribution limit that applies to all. In 2023, those eligible can deposit an additional $7,500 into their 401(k) or other plans above the regular $22,500 cap. By contributing this amount, it allowed individuals to save more for retirement as they were getting closer to retirement age, and in addition, it would reduce their taxable income as the extra $7,500 would be made to their current pre-tax plan.
Under the Secure 2.0 Act, a catch-up contribution rule would require high-income earners to contribute their catch-up contributions into after-tax Roth accounts, rather than their pre-tax plan.
This provision applies to individuals who earned more than $145,000 from a single employer in the prior year, and to the contributions made to 401(k), 403(b), or 457(b) retirement plans. It was to be effective for tax years starting on January 1, 2024, and meant that individuals above the threshold would not receive the same tax break they’ve previously enjoyed once the Act’s changes are implemented because they wouldn’t be permitted to make pretax catch-up contributions, which reduces the size of their income subject to tax.
Bottom Line for Retirement Savers
Thanks to the IRS’ transitional relief, all eligible participants are not only allowed to make catch-up contributions, but also still make pre-tax contributions in 2024 and 2025— regardless of their income level.
In other words, if you earn $145,000 and over you can still contribute catch-up contributions to your pre-tax plan in 2024 and 2025—but will have to contribute any catch-up contributions to a Roth account starting in 2026.
The Treasury Department and IRS indicated we can expect to receive further guidance relating to the provisions of the Secure 2.0 Act as they are still allowing and analyzing public comments on the Act through October 24, 2023.
To learn more about how you can take advantage of this important change, contact your Janney Financial Advisor.
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When you engage in an advisory relationship, you will pay an asset-based fee which encompasses, among other things, a defined investment strategy, ongoing monitoring, and performance reporting. Your Financial Advisor will serve in a fiduciary capacity for your advisory accounts.
For more information about Janney, please see Janney’s Relationship Summary (Form CRS) on www.janney.com/crs which details all material facts about the scope and terms of our relationship with you and any potential conflicts of interest.
By establishing a relationship with us, we can build a tailored financial plan and make recommendations about solutions that are aligned with your best interest and unique needs, goals, and preferences.
Contact us today to discuss how we can put a plan in place designed to help you reach your financial goals.
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