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.
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