Just a quick update from the IRS regarding catch-ups and high-income earners.
You may have heard that starting in 2024 those making $145,000 would have a change to their 401k catch-up contributions. These contributions would have turned into Roth dollars.
The short version is this has now been delayed until 2026. A slightly longer explanation is below.
First off, a catch-up contribution is something allowed for those turning 50. You are permitted to sock away more for your retirement. And just to clarify, this catch-up applies in the year in which you turn 50. You do NOT have to already be 50 before you can start doing it. So, if your birthday falls on December 30, you may participate in the catch-up in the year when you turn 50. You do NOT have to wait until the next calendar year to do the catch-ups.
The catch-up within 401ks (and 403bs and 457s) is now $7,500. This means you can sock away a total of $30,000 for employee contributions through your workplace retirement plans. This money can be directed as pre-tax/traditional contributions.
There were quite a few changes to retirement planning with the passage of SECURE Act 2.0. One change was specifically for those making more than $145,000 annually. The specific change was to require those catch-up dollars to be treated as Roth contributions, so no more tax reductions with that $7,500.
This change was to take place in 2024. However, late last week the IRS came out and said they were delaying the start of this requirement until 2026. They did mention you can continue to do the catch-up contributions until that point, but in a few years those making at least $145,000 will have those dollars go in as Roth funds.
I know I have been having this conversation with clients and how it will impact their taxes and also their retirement planning. Hopefully this is not complete news to you as your CFP® has had a similar discussion with you. If not, now you can impress your friends around the watercooler, assuming those still exist😉