Financial Planning, Retirement Planning

New Roth 401(k) Catch-Up Rules and Delays: What You Need to Know

September 22, 2023

By Kimberly I. McCarthy, Esq.,
Senior Vice President and Chief Wealth Client Services Officer
Washington Trust Wealth Management

The current state

Traditional retirement plan contributions are made on pre-tax contributions, grow tax-deferred until retirement, and are taxable when distributed. In contrast, Roth contributions are made on an after-tax basis and generally grow tax-free and are distributed tax-free.

(See: Choosing a Roth vs. Traditional IRA: It’s About More Than Just Taxes)

Catch-up contributions are extra contributions beyond the annual maximum that can be made by those over age 50 and can be made either on a pre-tax or after-tax basis.

The new rule

SECURE 2.0 will require that “catch-up” contributions be made as Roth vs. traditional contributions. This new rule applies to employees who earned more than $145,000 from a single company the prior year, and applies to contributions to 401(k), 403(b) or 457(b) plans.

The delay

Originally scheduled to go into effect next year, the change has been delayed to 2026. The IRS also clarified that plan participants who are age 50 and over can continue to make catch‑up contributions after 2023, regardless of income. i

(See: SECURE Act 2.0: Key Areas to Discuss with Your Wealth Advisor)

The impact

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.

(See: Choosing a Roth vs. Traditional IRA: It’s About More Than Just Taxes)

For many high earners in their peak earnings years – and in their highest marginal tax bracket –the upfront tax break while your tax rate is high is typically preferable.

Making pre-tax catch-up contributions during this period continues to provide a significant retirement planning benefit and a boost to your nest egg. The annual deferral limit for 2022 is $22,500, rising to $30,000 after including the maximum catch-up of $7,500. Until 2026, you have a choice and can continue to make your catch-up contributions on a Roth or pre-tax basis, as you see fit.

The planning opportunity

The delay - and the time to plan - is a welcome reprieve. Most importantly, now is the time to talk with your wealth advisor and tax professional about how to address the loss of pre-tax savings. Tax planning strategies to help offset the loss of the tax deduction include using a Donor Advised Fund (DAF) to increase Schedule A income tax deductions. Consider implementing some portfolio changes and harvesting investment losses, some of which may be used to offset ordinary income.

A forced Roth contribution and loss of a tax deduction may not be ideal for the short-term, but may end up being a smart move for the long-term. Several provisions from the Tax Cuts and Jobs Act, including lower individual tax rates, will sunset after 2025 without intervention from Congress, meaning the top rate will rise to 39.6% from 37%. ii You may be paying tax on income at a historically low tax rate now. Long term, you might fare better having these contributions go to the Roth 401(k), allowing the tax-free buildup for life, lowering future Required Minimum Distributions and passing tax-free assets to your heirs.

Washington Trust Wealth Management Can Help

At Washington Trust Wealth Management, we use a sophisticated software platform to determine when and how to best take advantage of tax benefits and savings potential and address changes in tax codes and laws, such as Secure 2.0. Working together, we can tailor your wealth strategies to your specific goals and circumstances to maximize your savings.

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