For individuals aged 50 and above, there are crucial revisions to the “catch-up” contributions permitted in salary deferral plans such as 401(k) Plans, 403(b) TSAs, 457(b) Government Plans, and SIMPLE Plans.

Catch-up Contributions for 50+: For eligible 401(k), 403(b), and 457(b) plans, the catch-up contribution cap for those over age 50 will remain $7,500 from 2023 through 2025. SIMPLE plans have a cap of $3,500. These figures are periodically indexed for inflation.

Enhanced Catch-up for Ages 60-63: New provisions beginning in 2025, under the SECURE 2.0 Act, introduce an additional catch-up allowance for those aged 60 to 63. This aligns with a strategic view that these are prime years to bolster retirement savings.

The SECURE 2.0 Act escalates these limits to either $10,000 or 50% more than the existing maximum catch-up amount, which sets the cap at $11,250 for 2025 for this age group. For SIMPLE plans, the calculation varies, setting a $5,250 maximum for 2025, increasing to $6,350 for organizations with 25 or fewer employees.

Requirement for Roth Contributions: Starting January 1, 2026, catch-up contributions for those with prior-year employer wages exceeding $145,000 must transition to Roth contributions.

• Inflation Indexation: The $145,000 threshold will be adjusted for inflation in future years.

• Eligibility Under Threshold: Catch-up contributions below this threshold can still be allocated as Roth contributions, offering flexibility in tax strategies.

• Lack of Employer Roth Plan: If no employer-designated Roth plan exists, employees with wages surpassing the threshold cannot partake in catch-up contributions.

• Partial Year Employment: Employees who worked a partial year will adhere to this requirement if their annual wages exceed the threshold in the preceding year.

Strategic Tax Planning: This legislative change opens opportunities for strategic tax positioning. Roth accounts provide a hedge against uncertain future tax rates by offering withdrawals of both contributions and earnings tax-free, assuming they meet the conditions such as the attainment of age 59½ and adherence to the five-year rule.

• Understanding the Five-Year Rule: Distributions are unqualified if made within five consecutive taxable years of initial contributions. Holding periods vary across different plans an employee contributes to.

Considering Contribution Timings: Effective planning of Roth contributions is essential. Young, high-income earners should consider starting contributions early to fulfill the five-year holding requirement; those closer to retirement may explore alternative approaches.

For further inquiries or guidance, please reach out to our office.