We have important news for higher-earning individuals aged 50 and up who are diligently planning for retirement! The Internal Revenue Service (IRS) has deferred the implementation of a new requirement affecting contributions to 401(k) plans and similar retirement savings vehicles. The rule, passed by Congress last year required any catch-up contributions to be funded with post tax dollars only. Originally slated to take effect next year, this rule has now been postponed until 2026 allowing for greater flexibility in retirement planning, particularly concerning the use of pre-tax dollars for catch-up contributions.
Under the current regulation, the general maximum allowable contribution to a 401(k) plan is $22,500 for this year. However, individuals aged 50 and older can make additional contributions up to $7,500 bringing the total allowable annual contribution to $30,000. Significantly, these “catch-up” payments can be made using either pre-tax dollars or post-tax dollars. The new law would require those who made more than $145,000 in wages to contribute in post-tax dollars only.
This legislative adjustment was initially designed to increase federal revenue within a 10-year budgetary window. Although the change could impact near-term tax planning, it is worth noting that Roth-style accounts using post-tax dollars offer tax-free growth and withdrawals in retirement. Therefore, the delay in implementation affords high earners valuable time to evaluate and possibly adjust their long-term retirement strategies while also providing much needed logistical relief to employers trying to transition to the new law.
Submitted by: Dave Watson