Some taxpayers who have been playing “catch up” on their retirement savings after age 50 will soon be losing one of the tax breaks they have enjoyed. Starting January 1, 2024, any catch up 401(k) contribution made by a taxpayer earning $145,000 or more during the previous year must be made – after taxes – into a Roth IRA. The aim of the IRS is to have high earning taxpayers pay taxes on income now, at a higher tax rate, rather than after they have retired and will (probably) be in a lower tax bracket.
The changes don’t apply to IRAs, which allow a catch-up contribution in 2023 of $1,000 for savers 50 and over on top of the $6,500 annual contribution limit.
An estimated 16% of eligible taxpayers made catch up 401(k) contributions last year. Savers ages 50 and older can make catch-up contributions in their 401(k) accounts each year, with eligible workers allowed to put an extra $7,500 into their accounts, up to a total of $30,000. For example, someone in a 35% bracket making a $7,500 catch up contribution could receive a $2,625 tax deduction for a $7,500 catch-up contribution, while someone in the 22% bracket would deduct $1,650.
These deductions for catch up contributions will go away for those earning $145,000 or more in the prior year. On the other hand, that post-tax contribution placed into a Roth IRA will grow tax-free and can be withdrawn tax-free.
For more information on taxes and retirement planning, please contact Gray, Gray & Gray at (781) 407-0300.