Problem with 401(k) Catch-Up Contributions in 2024
Problem with 401(k) Catch-Up Contributions in 2024
Last year, the SECURE 2.0 Act brought about significant changes to retirement account rules. While some of these changes have already been implemented, they have also caused some confusion. This confusion has been particularly problematic for older adults who need clarity on crucial retirement planning aspects, such as when to take required minimum distributions (RMDs).
Another upcoming change is the alteration of rules governing catch-up contributions for 401(k) plans. These modifications, scheduled for 2024, will require catch-up contributions for higher-income earners to be made on a Roth basis.
Now, making catch-up contributions on an after-tax Roth basis means paying taxes on your retirement savings during the years when you usually earn more. On the other hand, traditional 401(k) accounts allow you to defer taxes until retirement, which can be advantageous if you anticipate being in a lower tax bracket by then.
Under the SECURE 2.0 Act, individuals who are at least 50 years old and earned $145,000 or more in the previous year are eligible to make catch-up contributions to their employer-sponsored 401(k) accounts. However, there’s a catch. These additional contributions must be made on a Roth basis, using after-tax money. While you won’t receive tax deductions on these catch-up contributions like you would with typical 401(k) contributions, you can withdraw the money tax-free when you retire. It should be noted that this rule won’t apply to taxpayers making $144,999 or less in a tax year.
Now, let’s address the problem. When lawmakers drafted the Roth catch-up contribution provisions of SECURE 2.0, they inadvertently left out certain language in the law. Consequently, according to the current text of SECURE 2.0, no participant would be able to make catch-up contributions, regardless of whether they are on a pre-tax or Roth basis.
- 6 Ways to Boost Financial Well-being
- 5 ways to increase employee charitable giving in companies
- US job openings drop to lowest in over 2 years, but still at 9.6 mi...
Fortunately, Congress is aware of this and other drafting errors in SECURE 2.0, and lawmakers are likely to make technical corrections. However, this mistake adds further complexity to the existing challenges of implementing the catch-up contribution change by 2024.
The need for more time to modify systems and allow catch-up 401(k) contributions on an after-tax basis has led numerous employers, plan providers, and organizations to request a two-year delay to the Roth catch-up rule, pushing it to 2026. Over 200 entities, including ANBLE 500 companies, firms, public employers, and organizations like the American Retirement Association, Chipotle Mexican Grill, Fidelity Investments, Charles Schwab, Microsoft Corporation, and Delta Airlines, have voiced their support for this delay.
In a letter written by the American Benefits Council to the leaders of the U.S. House Ways and Means Committee, these groups highlighted the urgency of granting transition relief. They emphasized that without such relief, many retirement plan participants would lose the ability to make catch-up contributions at the end of this year. According to them, the required systems for enforcing the rule, which involves coordinating payroll systems, do not currently exist. Implementing a Roth feature for employer-sponsored 401(k) plans would also require effective communication with all participants. Additionally, the letter mentions the unique implementation obstacles faced by state and local governments and collectively bargained plans.
These organizations and companies argue that if the U.S. Treasury Department or the IRS fails to provide relief, there may be no catch-up contributions for 2024. However, history suggests that the IRS has previously delayed retirement plan rule changes and provided penalty relief, most recently with new RMD rules under SECURE 2.0 for inherited IRAs.
So, while there may be some confusion and challenges in the implementation of catch-up contributions on an after-tax basis, it is likely that legislators and government agencies will work to rectify the situation and provide the necessary relief to ensure a smooth transition. In the meantime, it is essential for individuals affected by these changes to stay informed and updated on any developments in this area of retirement planning.
