Good News for Highly Paid Retirement "Catcher Uppers"

Good News for Highly Paid Retirement "Catcher Uppers"

September 05, 2023

One of the more controversial provisions of the Securing a Strong Retirement Act of 2022 (SECURE 2.0) focused on changes in catch-up contribution rules for highly paid participants in employer retirement plans.

In the original Act, starting in 2024 employees earning salaries of more than $145,000 per year could only make after-tax Roth catch-up contributions to 401(k) and 403(b) plans. Pre-tax catch-up contributions would no longer be allowed.

A two-year reprieve

Responding to feedback and pressure from plan sponsors and recordkeepers, on August 25, 2023 the IRS granted a two-year delay in the effective implementation of this provision.

Referring to this change as a “administrative transition period,” the IRS stated that “"the first two taxable years beginning after December 31, 2023, will be regarded as an administrative transition period with respect to the requirement… that catch-up contributions made on behalf of certain eligible participants be designated as Roth contributions."

In other words, this provision won’t go into effect until 2026 at the earliest. Which means that plan participants over age 50 can continue to make catch-up contributions as pre-tax contributions, Roth contributions, or a combination of both.

This is good news for high-earners who would prefer to maximize pre-tax contributions to reduce their overall taxable income.

For 2023, the total contribution limits are $22,500 in regular contributions plus up to $7,500 in catch-up contributions, for a total of $30,000 for eligible participants.

Should you shun Roth contributions entirely?

Whether you're highly paid or not, just because you can continue to make pre-tax catch-up contributions doesn’t necessarily mean that this is the best strategy.

There may be some good reasons for you to split some of  your total contributions between pre-tax and after-tax Roth contributions:

  • Withdrawals of principal or earnings from your Roth 401(k) and 403(b) accounts are not subject to federal or state taxes, provided that you're age 59½ or older and it has been at least five years since you first contributed to the Roth.
  • Staring in 2024, Roth 401(k) and 403(b) accounts will no longer require annual Required Minimum Distributions, giving these accounts the same benefits as Roth IRAs.
  • You can roll over assets directly from your Roth 401(k) or 403(b) account to a Roth IRA with no tax consequences.
  • Your Roth account beneficiaries won’t have to pay taxes on either required or elective distributions if and when they inherit your accounts. 

If you need help figuring out whether a pre-tax, Roth, or combination contribution strategy makes sense, contact your tax professional or financial advisor.

  

###

 

This article was authored by Michael Flaherty and Jeffrey Briskin. Michael is a financial advisor located at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 508.598.1082 or mflaherty@canbyfinancial.com  Jeffrey Briskin is Director of Marketing at Canby Financial Advisors.

 

©2023 Canby Financial Advisors