What higher earners need to know about 401(k) catch-up contributions

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Higher earners maximizing savings ahead of retirement may soon lose a tax break, thanks to 401(k) changes enacted last year.

If you’re 50 or older, you can funnel extra money into your 401(k), known as “catch-up contributions.” For 2023, eligible workers can save another $7,500 after maxing out employee deferrals at $22,500.

But starting in 2024, higher earners can only make 401(k) catch-up contributions to after-tax Roth accounts, which don’t provide an upfront tax break but the funds can grow levy-free.

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The 2024 shift applies to individual accounts, meaning workers who earn more than $145,000 in 2023 from a single employer can expect to see the change, experts say.

“This change has already started to create administrative turbulence for employers as they plan for the January 1, 2024, implementation date,” said certified financial planner Jim Guarino, managing director at Baker Newman Noyes in Woburn, Massachusetts. 

“In addition, it may also cause high‐earning employees to rethink their decision to make catch‐up contributions after 2023,” said Guarino, who is also a certified public accountant.

Some 16% of eligible employees took advantage of catch-up contributions in 2022, according to a recent Vanguard report based on roughly 1,700 retirement plans. 

A separate Secure 2.0 change starting in 2025 boosts catch-up contributions by 50% for employees aged 60 to 63.  

Fund pretax catch-up contributions for 2023

Guarino urges higher earners to fund pretax catch-up contributions in 2023 while they still can because it provides a bigger tax break.

For example, let’s say an employee makes a $6,000 catch-up contribution while in the 35% tax bracket. If they withdraw the $6,000 in retirement while in the 15% bracket, they’ve saved $1,200 in taxes, he said.

Change provides tax diversification

Preparing for the catch-up contribution change

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