If You Make Over $145,000, You May Have to Pay Taxes on Your Catch-Up Contributions
High-income workers making catch-up contributions to employer-sponsored retirement plans will face changes starting in 2024. Those who earn $145,000 or more will be required to put this money into a Roth account, losing the ability to deduct these contributions from income taxes and instead allowing tax-free withdrawals from the account’s gains later in life. Here’s a closer look at the upcoming adjustments.
What Are Catch-Up Contributions?
To encourage retirement savings, the IRS allows “catch-up contributions” for those age 50 or older. For example, in 2023, an individual can contribute up to $22,500 to a 401(k) account and $6,500 to an IRA. Historically, catch-up contributions have been based on the underlying account, but that’s about to change for higher-earning households.
Section 603 Changes How Catch-Up Contributions Work
In 2022, Congress passed the law known as SECURE 2.0, which includes a change in how catch-up contributions work for higher-income households. Beginning Jan. 1, 2024, catch-up contributions to employer-sponsored plans must be made on a Roth basis for those who earned over $145,000 in the previous tax year. Contributions may not be deducted from income and will be taxed up front, while withdrawals are untaxed later in life. This rule will not affect IRA plans, but will require employers to offer Roth plans in addition to standard retirement plans.
What Does This Mean for Taxes?
The new tax cap intentionally targets those earning over $145,000 and will serve to incentivize employers to establish more Roth options in their retirement plans. For individuals looking to avoid this tax issue, opening an IRA can be a good alternative investment strategy, as they are pretax accounts with lower maximum contribution limits.
This Issue Has Been Mistaken for a Mistake
The new tax cap is not a mistake. It originated from a drafting error in the SECURE 2.0 Act, which inadvertently deleted a small paragraph in the Internal Revenue Code and potentially made pretax catch-up contributions illegal for everyone. Members of Congress have stated they intend to correct this error, although it has not been fixed at the time of writing.
High-income earners making catch-up contributions may soon face tax changes. If you earn more than $145,000 per year, you will no longer be able to deduct catch-up contributions and will have to place them in a Roth plan, creating tax implications. Consider working with a financial advisor to navigate these changes and develop a comprehensive retirement plan.
Retirement Planning Tips
A financial advisor can help you build a retirement plan that addresses catch-up contribution opportunities. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, making it easy to find an advisor who can help you achieve your financial goals.
Catch-up contributions can be a valuable way to boost retirement savings. Consider engaging with a financial advisor to make the most of them.