Next year, new regulations from the Safe 2.0 Retirement Act will impact high-income individuals who make "catch-up" contributions to 401(k) or other workplace retirement plans. Key changes include:
-
Catch-Up Contributions: Individuals over 50 can contribute above the standard limit ($23,500 this year) with a catch-up amount of $7,500 (or up to $11,250 for ages 60-63). Starting next year, those earning over $145,000 will have these contributions taxed as regular income, much like Roth 401(k) contributions.
-
Retirement Plan Options: Most workplace plans (93%) offer a Roth 401(k), but if an employer does not provide this option, individuals over 50 cannot make catch-up contributions.
- Tax Implications: High earners may face higher tax rates on catch-up contributions during peak earning years, which could diminish their after-tax income. However, there are benefits to the new rules, such as tax-free growth of Roth investments and no mandatory withdrawals from Roth accounts at age 73.
Overall, while the changes could increase tax burdens for some, they also provide greater flexibility and potential tax-free income in retirement.
