Laurence Hale, AAMS®, CRPS®
Principal/Managing Partner, Investment Advisor & Chief Investment Officer
The IRS recently granted a two-year delay on new limitations to retirement plan catch-up contributions. If you’re 50 or over and eligible for catch-up contributions this could be a game-changer for you in terms of how much you’re able to save before you retire. Here’s what you should know to take advantage of this potentially valuable opportunity.
What are Catch-Up Contributions and What are the Limits?
Catch-up contributions allow workers who are age 50 and over (or who will turn 50 during the year) to make contributions to their qualified retirement plans in excess of the standard limit.
In 2023, the standard contribution limit for IRAs (both traditional and Roth combined) is $6,500. But those who are 50 or older can contribute an additional $1,000. The standard limit for a traditional 401(k) is $22,500, with an additional $7,500 in catch-up contributions allowed, and the standard limit for a Roth 401(k) is $22,500, with an additional $5,500 in catch-up contributions allowed.
What is a Roth Account?
A Roth retirement account is a type of retirement account – either an Individual Retirement Account (IRA) or an employer-sponsored 401(k) – in which contributions are made with after-tax dollars. This means you don’t enjoy the tax break that you’d get from contributing to a traditional IRA or 401(k) with pre-tax dollars. However, qualified withdrawals from a Roth account are typically tax-free in retirement. This makes Roth accounts a popular choice for individuals who anticipate being in a higher tax bracket when they retire or those who want tax-free income in their retirement years.
What are the Recent Changes to Rules Regarding Catch-Up Contributions?
In late 2022, Congress passed the SECURE 2.0 Act which, among other changes, reshaped how catch-up contributions work for higher-earning households, especially those with employer-sponsored plans like 401(k)s. The new legislation said that if you earned more than $145,000 in the previous tax year, you must make all catch-up contributions on a Roth basis – meaning individuals would no longer get a tax break on those contributions in the current year.
This change was set to kick in on January 1, 2024, but there's been a recent development. In September, the IRS announced that it would postpone the mandatory Roth IRA catch-up contribution requirement for high-earning participants until 2026.
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How Can I Benefit from the Delay of the Roth Catch-Up Contribution Rule?
The delayed implementation of this rule offers a golden opportunity for those who are eligible for catch-up contributions to maximize those contributions with pre-tax dollars in the next couple of years. Thanks to compounding interest and the historically favorable long-term performance of the stock market, those additional funds could turn into a much larger nest egg to rely on, especially for those who are still on the younger side of the catch-up contribution age requirement, with decades likely still left to live.
As you near retirement, it’s important to understand how much you can (and should be) contributing to your retirement plan, as well as other tax and deferral implications. Working with a qualified financial advisor can be illuminating as you prepare for this important life milestone. Here at Weiss, Hale & Zahansky Strategic Financial Advisors, we can help you make a strategic retirement plan using our Plan Well, Invest Well, Live Well™ process. You can request a complimentary consultation on our website or call us at (860) 928-2341.
Presented by Principal/Managing Partner Laurence Hale AAMS, CRPS®. Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your representative. Weiss, Hale & Zahansky Strategic Wealth Advisors does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice. 697 Pomfret Street, Pomfret Center, CT 06259 and 392-A Merrow Road, Tolland, CT 06084. 860-928-2341. www.whzwealth.com.