IRS Extends Time for Pre-Tax 401(k) Catch-Up Contributions

 Posted on September 20, 2023 in Taxation Law

Taxpayers who own retirement accounts can often take steps to maximize the amount of money they are able to save and ensure that they will have sufficient financial resources later in life. However, the rules regarding retirement account contributions have changed in recent years, and this has led to some confusion about the types of contributions that may be made and the taxes that may apply. To give taxpayers, employers, and retirement plan administrators more time to adjust to these changes, the IRS is providing a longer transition period before changes in the law will be implemented.

The SECURE 2.0 Act and Catch-Up Contributions for Higher Income Earners

The SECURE 2.0 Act, which was passed in 2022, made some changes to how taxes apply to retirement accounts. One provision of the act addressed catch-up contributions to 401(k) plans and other retirement accounts. These contributions may be made by people over the age of 50 beyond the annual deferral limit. In 2023, the employee deferral limit is $22,500, which is the total amount that can be withheld from a person’s income each year and saved in a 401(k) account. People who are at least 50 years old can contribute an additional $7,500, which is known as a catch-up contribution.

Under the SECURE 2.0 Act, certain limitations were placed on catch-up contributions for high income earners. Specifically, for taxpayers who earn at least $145,000 per year from a single employer, catch-up contributions must be made on a Roth basis. That is, contributions must be made after income taxes have been applied. Prior to this change, these taxpayers could elect to make contributions before taxes were withheld.

The provision regarding catch-up contributions for high income earners was originally set to go into effect for tax years starting after December 31, 2023. However, multiple organizations in the financial sector requested more time to implement the necessary changes to retirement plans. In response to this request, the IRS has announced that the implementation of this rule will be delayed by 2 years. The rule will now go into effect on January 1, 2026. This may allow taxpayers more time to make pre-tax contributions to retirement plans while making the necessary adjustments for post-tax contributions in the future.

The IRS also provided some clarification on issues that may affect taxpayers who make catch-up contributions. The $145,000 threshold applies to FICA wages paid by an employer. People who are self-employed or who are not paid wages that are subject to FICA may continue to make pre-tax contributions, even if their income exceeds the threshold. In addition, the threshold only applies to income earned from a single employer. If a person works for multiple employers, and their aggregate income exceeds $145,000, they may still be able to make pre-tax catch-up contributions as long as the income earned from each individual employer is below the threshold.

Contact Our San Jose, CA Tax Lawyer

Tax concerns related to retirement plans can involve a variety of complex issues, and changes to tax laws and policies may affect tax planning strategies. At John D. Teter Law Offices, our San Jose tax law attorney can provide guidance on how the SECURE 2.0 Act may affect taxes on retirement plans, and we can work with taxpayers to ensure that they are positioned for success in the future. Contact our firm at 408-866-1810 to arrange a consultation and learn more about how we can address tax-related concerns.