Currently, savers ages 50 and older can make catch-up contributions in their 401(k) accounts each year, with eligible workers allowed to put an extra $7,500 into their accounts, for a total of $30,000 this year.
Starting next year, those catch-up funds will be funneled only into after-tax Roth accounts for those who earned more than $145,000 the previous year.
This change means many workers will pay taxes on their catch-up money up front during high-earning years, rather than in retirement when they may be in a lower tax bracket.
Those affected by the change will see an increase in their tax. For example, a taxpayer in the 35% bracket will pay $2,625 on the $7,500 forced into the after-tax Roth.
The change is slated to begin on January 1, 2024. There are calls to delay this law change from those companies that provide payroll services and the 401k recordkeepers. The logistics of determining who has earned $145,000 the previous year is troublesome.
The change does not affect IRA’s.
Some high earners might look at the change favorably as they can now take advantage of the Roth benefits such as tax-free growth and income tax free distributions for themselves and their heirs to name a few.
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