A significant shift is coming in how catch-up retirement plan contributions are handled. Starting in 2024, for those earning $145,000 or more, catch-up contributions must be placed in a Roth account. Unlike before, these contributions won't reduce taxable income initially, but future earnings can be taken out tax-free later in life. Here's an overview of what this means.
Catch-Up Contributions Explained
Every year, there's a limit on how much one can invest in a retirement account like a 401(k) or IRA without being taxed. If you are under 49 years old, you can contribute $22,500 to a 401(k) and $6,500 to an IRA.
To encourage savings, individuals 50 or older can make extra contributions known as "catch-up contributions." Starting in 2023, you can contribute an extra $7,500 to a 401(k) or $1,000 to an IRA.
But those in higher income brackets will soon see a change.
How Catch-up Contributions Work
In 2022, the SECURE 2.0 Act was signed into law, leading to numerous adjustments to retirement planning in the U.S. One notable change is Section 603.
This section alters the rules for high earners contributing extra funds to employer-supported plans such as 401(k)s. If your income exceeds $145,000, you will only be able to make these extra contributions to a Roth account using after-tax income. However, there'll be no taxes upon distributions later in life.
IRAs are not affected by this rule.
This regulation doesn't affect contribution limits, but employers must now introduce Roth options in their retirement offerings. This change has not been universally welcomed due to the complexity involved.
This regulation will be effective from January 1, 2024.
If your income exceeds $145,000, beginning in 2024, catch-up contributions to employer-backed plans must be made to a Roth account. Though this means paying taxes upfront, gains will be tax-free upon withdrawal.
If you find yourself eligible to make catch-up contributions to a retirement account, you can consider doing so through a tax-advantaged crypto Roth IRA at iTrustCapital. You can benefit from tax-free gains upon withdrawal, even as the rules evolve.
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