IRS delays change for 401(k) catch-up contributions. Here's what higher earners need to know

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Higher earners who maximize status savings present person much clip for pretax catch-up 401(k) contributions, acknowledgment to caller IRS guidance. 

Currently, "catch-up contributions" let savers 50 and older to funnel an other $7,500 into 401(k) plans and different status plans beyond the $22,500 worker deferral limit for 2023.

A alteration enacted via Secure 2.0 would person eliminated the up-front taxation interruption connected catch-up contributions for higher earners by lone allowing these deposits successful after-tax Roth accounts, starting successful 2024.

But the IRS connected Friday announced a two-year hold for the change, meaning savers tin inactive marque pretax catch-up contributions done 2025, careless of income.

"The administrative modulation play volition assistance taxpayers modulation smoothly to the caller Roth catch-up requirement," the IRS said successful a statement. 

The Secure 2.0 alteration applies to employees making catch-up deposits to 401(k), 403(b) oregon 457(b) plans who earned much than $145,000 from a azygous institution the anterior year. 

Some 16% of eligible employees took vantage of catch-up contributions successful 2022, according to a recent Vanguard report based connected astir 1,700 status plans.

Delay is 'a precise bully thing' for status plans

The hold is "a precise bully thing" for status program administrators, said Dan Galli, a Norwell, Massachusetts-based certified fiscal planner and proprietor of Daniel J. Galli & Associates.

"There's nary mode to bash this close without a mates of years of preparation," helium added.

There's nary mode to bash this close without a mates of years of preparation.

Dan Galli

Owner of Daniel J. Galli & Associates

Roughly 200 organizations wrote a letter to Congress successful July asking for much clip to instrumentality the 401(k) changes, and galore are applauding the delay.

Retirement program sponsors are grateful for the agency's "critically important relief," Diann Howland, vice president of legislative affairs for the American Benefits Council, said successful a connection connected Friday.

"Without this further compliance period, a immense fig of plans and employers would not person been capable to comply with the caller request and apt would person had to suspend catch-up status contributions," she said. 

'Leverage the little taxation brackets'

While higher earners present person an other 2 years for pre-tax catch-up 401(k) contributions, immoderate whitethorn inactive see after-tax deposits with impending income taxation instrumentality changes, Galli said.

"This truly coincides good with the changing taxation brackets coming successful 2026," helium said. Several provisions from the Tax Cuts and Jobs Act, including little idiosyncratic taxation rates, volition sunset aft 2025 without involution from Congress.

While pre-tax 401(k) contributions supply an upfront taxation break, after-tax Roth deposits let funds to turn and beryllium withdrawn successful status tax-free. And with imaginable taxation hikes connected the horizon, it whitethorn marque consciousness for immoderate investors to wage taxes now.

"What we're doing with clients close present is trying to leverage the little taxation brackets for arsenic agelong arsenic we can," Galli said.

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