IRS Extends Roth IRA Catch-up Requirement

IRS Extends Roth IRA Catch-Up Requirement

The Secure 2.0 Act made changes to retirement contributions that were supposed to go into effect for the 2024 tax year. These changes mean that higher income earners could only make catch-up contributions to their Roth IRA or 410 (K) plans with after tax dollars. This August, the IRS extended the start of the new requirement.

As the Wall Street Journal pithily summarizes it, “Higher earners age 50 and up will get two more years to use pretax dollars for all of their retirement savings in 401(k)s and similar plans, after the Internal Revenue Service delayed a new requirement.”

Who This Will Affect

According to the guidance, starting in 2024, the new Roth IRA catch-up contribution rule applies to an employee who participates in a 401(k), 403(b), or governmental 457(b) plan and whose prior-year Social Security wages exceeded $145,000.

The IRS has announced an administrative transition period that extends until 2026. Currently, Roth IRA and 410(k) contributors can make catch-up contributions of up to $7500 using pre-tax income. The new requirement will be that any catch-up contributions made by higher‑income participants (over $145,000 annually) in employee sponsored 401(k) and similar retirement plans must be designated as after-tax Roth IRA contributions.

The IRS has also clarified that plan participants who are age 50 and over can continue to make pre-tax catch‑up contributions after 2023, regardless of income.

Transitioning to New Roth IRA Catch-up Requirement

The administrative transition period will help taxpayers and employers transition smoothly to the new Roth catch-up requirement and is designed to facilitate an orderly transition for compliance with that requirement, according to the IRS. The notice also clarifies that the SECURE 2.0 Act does not prohibit plans from permitting catch-up contributions, so plan participants who are age 50 and over can still make catch-up contributions after 2023.

The Treasury Department and the IRS say they will be issuing future guidance to help taxpayers. The notice describes several positions that are expected to be included. As with most IRS announcements, the rules can be complex. Be sure to get competent advice to make sure you understand how this change may affect you.

To learn more about how your 401(k) and Roth IRA amounts and contributions affect your estate planning, contact us.