By. Andrew T. Gardener, CFP®

Employees 50 and Older

In order to help those nearing retirement save more, employees 50 and older are allowed to make so-called “catch-up” contributions to their 401(k) plans.  The employee has always had the discretion to make these contributions into traditional or Roth 401(k)s.

Along with regular contribution limits, these “catch-up” contribution limits have steadily increased over the years and in 2023 allow an additional $7,500 contribution.  This is in addition to the maximum employee contribution of $22,500 that everyone with income at or above that amount is allowed.

Traditional vs. Roth

401(k) contributions to a traditional 401(k) are tax-deductible in the year of the contribution and will grow tax-deferred,  but all distributions will eventually be fully taxable.  Roth contributions, on the other hand, are considered “after-tax,” so there is no current tax deduction, but if you follow the rules of the Roth, distributions will come out completely tax-free.

SECURE Act 2.0

The SECURE ACT 2.0, passed in December 2022, changed the rules for any “catch-up” contributions for employees who earned over $145,000 in the previous year.  “Catch-up” contributions for them would only be allowed into Roth 401(k)s in 2024 and beyond. This would take away the current tax deduction on those “catch-up” contributions.

IRS Relief

The IRS recently announced that they would delay enforcement of this provision and allow all employees 50 and over to continue to make “catch-up” contributions to either traditional or Roth 401(k)s regardless of income, through 2025.  The new requirements would now not take effect until 2026.

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