Recently, there’s been concern over planned changes to rules governing catch-up contributions for 401(k) plans. The changes, which initially were going to be effective in 2024, will require catch-up contributions for higher-income earners to be made on a Roth basis. (Making catch-up contributions on an after-tax Roth basis means paying taxes on your retirement savings during the years when you usually earn more.) 

The change enacted by Congress last year will force high earners to put so-called catch-up contributions into Roth-style accounts funded with post tax dollars. The law applies to workers who earned over $145,000 in wages during the prior year and contribute more than the general maximum for 401(k)s, which is $22,500 this year (both limits will be indexed for inflation).

Late on Friday, the IRS announced that it was postponing the new law until 2026 to “facilitate an orderly transition for compliance.” Higher earners ages 50 and up will now get two more years to use pretax dollars for all of their retirement savings in 401(k)s and similar plans.

The IRS also clarified that plan participants ages 50 and older can make pre-tax catch-up contributions in 2023 despite their income level.

So, what does this mean for me?

If you’re at least 50 years old, regardless of your income level, you can continue to make catch-up contributions on a pre-tax basis through your employer-sponsored retirement plan. However, beginning in 2026, those catch-up contributions will have to be made on a Roth basis if your income meets or exceeds the $145,000 threshold (indexed for inflation).

While the rule is postponed, it is still a good idea to start planning now. We can help you determine the best way to maximize your retirement savings. Contact us today!