David Strege, CFP®, CFA, CKA®, Senior Financial Planner
October 9, 2023
Congress passed a law that can’t be implemented on time, imagine that! In late December 2022, Congress passed Secure 2.0 Act. In that enacted law there is a provision concerning catch-up contributions in 401(k) plans. If you are at least 50 years old with an earned income of $145,000 or more and make catch-up contributions, then keep reading.
In 2023, individuals who are at least age 50 with earned income are allowed to contribute up to $22,500 into your 401(k) PLUS an additional contribution of $7,500 by the catch-up provision. Like the traditional 401(k) contributions, this catch-up amount goes into your 401(k) before federal and state income taxes were withheld (pre-tax). It does NOT reduce your Social Security and Medicare FICA taxes. That said, a few employer plans have a Roth 401(k) provision, and you can choose to have your 401(k) contributions go into the Roth component AFTER federal and state taxes to be able to withdraw contributions and growth tax free after a Roth has been open for at least five years.
Then along came the Secure 2.0 Act. In that bill is a provision that says if you are at least age 50 and are going to make a catch-up contribution starting in 2024, there will be a change if your earned income in the previous year is more than $144,999. The law states that beginning in 2024 your catch-up contributions MUST go into a ROTH 401(k). The U.S. government must have felt a need for some minor tax revenue increases and put in this provision so the catch-up contribution amount would still be taxed.
Once the law was enacted, problems started bubbling up about how this law could not be effectively implemented. Most employer retirement plans do not have a Roth component. To add one requires plan amendments and approval by the plan trustees. Once added then administration details must be established to make sure contributions are noted properly and tracked into which bucket they are going. Hundreds of companies and retirement plan administrators raised this issue loudly. The theme was a request to delay implementation of this component of the law to 2026.
In late August 2023, the Internal Revenue Service (IRS) announced that the catch-up provision will NOT change until 2026. This means that you can contribute your catch-up amount pre-tax in 2024 AND 2025. Please be sure to consult with a tax professional in conjunction with your personal financial planning team to determine whether you should make pre-tax or post-tax 401(k) contributions.
David Strege is a Senior CERTIFIED FINANCIAL PLANNER™ practitioner at Syverson Strege in West Des Moines, Iowa, helping individuals and families lay out an integrated personal financial plan to efficiently get them from where they are to where they want to be. He is chairman of the company’s board of directors and serves on the investment committee.