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This week, the IRS and the US Treasury wrapped up new provisional guidelines from the Safe 2.0 Act of 2022, which includes provisions for catch-up contributions for workers aged over 50 in 401(k) and other retirement plans.
Starting in 2027, contributions for catch-up will change, particularly for those who made more than $145,000 with their current employers in the previous year. These will need to be pre-tax, often referred to as losses. Still, some modifications might emerge as early as 2026, based on “reasonable and honest interpretations of the law,” according to the IRS.
As things stand, experts suggest that investors can opt for catch-up contributions as pre-tax or loss retirement, assuming they have both options available within their workplace plans and the cash flow allows it.
Lawmakers included a Roth catch-up contribution provision to help finance the Safe 2.0 Act.
Roth contributions involve after-tax deposits, which then grow tax-free, while traditional pre-tax contributions lower one’s taxable income upfront but incur taxes upon withdrawal.
It’s worth noting that contributing to a Roth could influence the eligibility for other deductions, so it’s essential to evaluate your overall financial situation when considering these contributions.
Patrick Huey, a CFP and owner of Victory Independent Planning in Portland, Oregon, expressed optimism about guiding clients through this process. “We look forward to seeing you,” he noted.
He suggested that it might be necessary to “accelerate” pre-tax catch-up contributions by 2026 or to “accept a transition to loss.”
“Don’t sit on the sidelines.”
Starting in 2025, workers can defer contributions in their 401(k) plans, which could be as high as $23,500, in addition to another $7,500 for those over 50. For individuals aged between 60 and 63, there’s a “super catch-up” option, raising this limit to $11,250.
Interestingly, in 2024, nearly all retirement plans allowed catch-up contributions, but only 16% of eligible workers took advantage of them, according to a Vanguard report that analyzed over 1,400 plans with nearly 5 million participants.
Reports indicated that most catch-up contributors earned over $150,000.
The decision between Roth and traditional catch-up contributions could vary based on many factors, like current and anticipated tax brackets, as experts indicate.
Jared Gagne, assistant vice president and private wealth manager at Claro Advisor in Boston, emphasized that with changing rules, investors should stay proactive instead of remaining “on the sidelines.”
