IRS delays ‘Secure 2.0’ change for 401(k) catch-up contributions

Larger earners who maximize retirement financial savings now have extra time for pretax catch-up 401(ok) contributions, because of new IRS steering. 

At the moment, “catch-up contributions” enable savers 50 and older to funnel an additional $7,500 into 401(ok) plans and different retirement plans past the $22,500 worker deferral restrict for 2023.

A change enacted by way of Safe 2.0 would have eradicated the upfront tax break on catch-up contributions for greater earners by solely permitting these deposits in after-tax Roth accounts, beginning in 2024.

However the IRS on Friday introduced a two-year delay for the change, that means savers can nonetheless make pretax catch-up contributions via the top of 2025, no matter revenue.

“The executive transition interval will assist taxpayers transition easily to the brand new Roth catch-up requirement,” the IRS stated in an announcement. 

The Safe 2.0 change applies to workers making catch-up deposits to 401(ok), 403(b) or 457(b) plans who earned greater than $145,000 from a single firm the prior 12 months. 

Some 16% of eligible workers took benefit of catch-up contributions in 2022, in line with a latest Vanguard report based mostly on roughly 1,700 retirement plans.

The delay is “an excellent factor” for retirement plan directors, stated Dan Galli, a Norwell, Massachusetts-based licensed monetary planner and proprietor of Daniel J. Galli & Associates.

“There is not any method to do that proper with out a few years of preparation,” he added.

About 200 organizations wrote a letter to Congress in July asking for extra time to implement the 401(ok) modifications, and lots of are applauding the delay.

Retirement plan sponsors are grateful for the company’s “critically necessary aid,” Diann Howland, vp of legislative affairs for the American Advantages Council, stated in an announcement Friday.

“With out this extra compliance interval, an unlimited variety of plans and employers wouldn’t have been capable of adjust to the brand new requirement and certain would have needed to droop catch-up retirement contributions,” she stated. 

Whereas greater earners now have an additional two years for pretax catch-up 401(ok) contributions, some should still take into account after-tax deposits with impending revenue tax legislation modifications, Galli stated.

“This actually coincides properly with the altering tax brackets coming in 2026,” he stated. A number of provisions from the Tax Cuts and Jobs Act, together with decrease particular person tax charges, will sundown after 2025 with out intervention from Congress.

Whereas pre-tax 401(ok) contributions present an upfront tax break, after-tax Roth deposits enable funds to develop and be withdrawn in retirement tax-free. And with attainable tax hikes on the horizon, it could make sense for some buyers to pay taxes now.

“What we’re doing with shoppers proper now could be making an attempt to leverage the decrease tax brackets for so long as we are able to,” Galli stated.