By Kathryn Mayer
Starting next year, some workers who make catch-up contributions to employer-sponsored retirement plans, like a 401(k), will have to instead put that money into Roth accounts—news that has big implications for both employees and employers.
Earners making $145,000 or more must make catch-up contributions on a Roth basis rather than pretax contributions, effective Jan. 1, 2024. The change is a result of the SECURE Act 2.0, the law passed in December that includes a series of sweeping changes to the retirement landscape.
The change not only means many high earners are slated to lose a popular tax deduction, but it also means that employers who allow catch-up contributions will need to begin offering Roth plans in addition to their standard pretax retirement plans. That’s leading some employers and plan providers to push back, with several industry groups arguing that establishing new Roth plans will involve time and money. Many are calling on Congress to delay the rule by at least two years.
Which Workers Does the Change Affect?
Individuals who earn $144,999 or less are exempt from the upcoming change. Those workers can continue to deduct their contributions to an employer-sponsored retirement account, which includes catch-up contributions. The provision only applies to people who earn $145,000 or more. Under the new change, those workers can fully deduct their contributions to a 401(k) account up to a standard annual limit. They are not allowed to deduct income used for catch-up contributions and instead must pay taxes on that money. This money must go into a Roth account, which returns growth untaxed. Contribution limits will not change since individuals will still contribute this money to an employer-sponsored plan. For 2023, people 50 and older are allowed to put an extra $7,500 into their accounts, for a total of $30,000.
Companies Call for Delay
Roughly 200 organizations penned a letter to the House Ways & Means Committee earlier this month requesting additional time for Section 603 of SECURE 2.0—the Roth catch-up contribution provision.
The letter was written by the American Benefits Council and signed by a number of employers and plan providers, including Charles Schwab, Chipotle Mexican Grill, Delta Air Lines, Fidelity Investments and PepsiCo. The letter requests the committee delay the provision by two years, as well as provide transition relief. “Obviously, any new rule requires new administrative work to implement,” the letter reads. “But we have been struck by the overwhelming input from the retirement community that this particular task simply cannot be done in time by a vast number of plans.”
Changing How Workers Pay Taxes
The Roth catch-up contribution provision means many workers will pay taxes on their catch-up money now, during their high-earning years, instead of in retirement, when those workers may find themselves in a lower tax bracket. It’s possible the change will transform how many workers save for retirement and create financial and estate-planning strategies. Making pretax catch-up contributions historically has meant a big advantage for high earners. The Wall Street Journal reports that someone in a 35 percent bracket would receive a $2,625 tax deduction for a $7,500 catch-up contribution, while a person in the 22 percent bracket could deduct $1,650. However, some financial advisers say the change may be helpful for getting those close to retirement to put more money into a Roth, where money grows and can be withdrawn tax-free.