If you are over 50 and earn more than $145,000 per year, there’s an impending 401k rule change you need to know about. Beginning next year, any catch-up contributions you make will be immediately subject to income tax. Then, once your money is invested it will grow tax free. Currently once you’ve maxed your contributions for the year your catch-up contributions can be made tax-deferred. The change stems from legislation that was passed in 2022 called the Secure Act 2.0 which was created to encourage Americans to save more for retirement.
Today, only a small percentage of pre-retirees feel that they will be able to live comfortably in retirement. Government officials want to change that. In January of this year all employers were required to establish a 401k or 403b plan and automatically enroll all employees at a minimum contribution of 3%. In addition, the catch-up limits for Americans nearing retirement age were increased to help pre-retirees their retirement savings more quickly. And the 401k rule change that will go into effect next year will help people pay less in taxes.
Starting next year, if you are 50+ and a high earner your catch-up contributions will be taxed like a Roth. This is a good thing! It’s better to pay taxes when you know what the rate is and much easier to pay higher taxes while you are still working. With tax-deferred contributions, taxes are paid when distributions are taken. It’s impossible to know what the tax rate will be in 20 or 30 years, but it’s likely they will be higher than current tax rates.
This new 401k rule change is appealing but does have a catch. If you work for a company that doesn’t offer a Roth 401k option you will be prevented from making catch-up contributions. Yes, even if you are over 50 and a high earner. If you have questions or would like to schedule a retirement planning strategy session, call 800-689-3935.