What You Must Know
- The IRS is delaying, till 2026, a rule mandating that catch-up contributions for sure high-income taxpayers be handled as Roth contributions.
- A $145,000 revenue threshold, listed for inflation, shouldn’t be tied to current definitions of extremely compensated staff.
- Beginning in 2025, a separate catch-up contribution will probably be permitted for taxpayers between 60 and 63 years previous.
The Inside Income Service has provided a two-year delay for the Setting Each Neighborhood Up for Retirement Enhancement (Safe) 2.0 Act’s mandate that every one catch-up contributions for sure high-income taxpayers be handled as Roth contributions.
Nonetheless, many plan sponsors and members have been questioning concerning the particulars that can decide how the rule is carried out in observe.Â
In the identical steering that delayed the formal efficient date of the Roth catch-up mandate, the IRS answered some urgent questions — and acknowledged that further questions stay to be answered in forthcoming steering.Â
Safe 2.0 & Catch-Up Contributions: The Fundamentals
For company-sponsored retirement plans, together with 401(okay)s and 403(b) plans, the catch-up contribution restrict is $7,500 in 2023. Beginning in 2025, a separate catch-up contribution is permitted for taxpayers who’re between ages 60 and 63. That contribution restrict will probably be equal to the larger of (1) $10,000 or (2) 150% of the usual catch-up contribution restrict for 2024. The $10,000 restrict can even be listed for inflation. As soon as the taxpayer turns 64, the usual catch-up contribution restrict applies.
Beginning in 2026, after the two-year IRS delay, if a taxpayer has revenue of at the least $145,000 for the prior yr, the catch-up contribution for the following yr have to be handled as a Roth contribution. Meaning these funds are contributed with after-tax {dollars}, so they won’t cut back present taxable revenue however might be withdrawn tax-free sooner or later. The $145,000 quantity can even be listed for inflation.
The $145,000 threshold is new and isn’t tied to current definitions of extremely compensated staff. That quantity can also be tied to W-2 revenue, so if an S company proprietor takes $130,000 in compensation but in addition receives further earnings from the company, the proprietor won’t have crossed the $145,000 threshold to set off the Roth contribution rule.
