Many high-income earners were mourning the loss of their pre-tax catch-up contributions to their 401(k) plans with the Secure 2.0 Act. These catch-up contributions for those ages 50 and older were quite sizable and allowed contributors to minimize the taxes paid on high income today. The bet was that you’ll be in a lower tax bracket in retirement when you will start taking withdrawals – but this was all set to change. 

The good news is that on August 25, 2023, the IRS announced a two-year delay for some of the Secure 2.0 Act which allows all high-income earners to make those tax-deductible contributions. 

What does the delay mean for you? Learn more about what high-income earners should know about the Secure 2.0 Act and its recent update here. 

About the Secure 2.0 Act

The Secure 2.0 Act has a number of important features that everyone should be aware of, even though the implementation of parts has been delayed. It impacts everyone who has their eyes fixed on the golden years, which will approach much faster than you can imagine. Rollout of Secure 2.0 will take place over the course of the next several years.

First, it pushed back the age for required minimum distributions (RMD) from age 72 to 73 (eventually hitting age 75 in 2033). The penalty for not taking your distributions has also been significantly lessened from 50 percent to 25 percent. 

Catch-up contributions will rise in 2025 for those ages 60 to 63, hitting $10,000 instead of the usual $7,500 in 2023.

Additionally, it created several new financial benefits such as no RMDs on in-plan Roth 401(k)s, a pension linked emergency savings account, and the ability to roll 529 Plan funds into a Roth IRA for your beneficiaries who have excess 529 funds or may not be pursuing higher education. 

However, the most significant change for high-income individuals related to the sought-after catch-up contributions as they near retirement age. 

Updates to 401(k) Catch-Up Contributions

Perhaps the most significant change is related to the catch-up contributions that can be made by older individuals (ages 50 and up). If your annual income exceeds $145,000, you would no longer be permitted to funnel those catch-up contributions with pre-tax dollars. This extra $7,500 was mandated to be funneled into an after-tax Roth account instead. Originally, this was slated to start in 2024. 

In other words, starting in 2024, you would have lost the ability to deduct those contributions from your gross income at the end of the year. 

Even though you may benefit from tax-free withdrawals from Roth accounts in retirement, most people will be in a lower income bracket in retirement compared to their working years, so this benefit may not be a perk to you. 

Fortunately, on August 25, 2023, the IRS announced a two-year delay for this change. This means that everyone can still make pre-tax catch-up contributions through the end of 2025, no matter how much money they make each year. 

What Does This Mean for Me? 

If you are looking to maximize your tax deductions and save on taxes for the next two calendar years, the delay to this portion of the Secure 2.0 Act is phenomenal news. You can effectively take a maximum deduction on your catch-up contributions of $7,500 if you make the full contribution to a retirement savings plan. This can save you up to $2,775 in the 37% tax bracket!

Not to mention, this means you will be able to allow a larger sum of money to grow tax-deferred until you are ready to withdraw it in retirement. Overall, it could have a significant impact on your personal tax planning. 

While many people are excited about the delay, it is worth noting that you may actually benefit from transitioning to a Roth 401(k) plan now. Roth plans allow you to withdraw money tax-free in retirement because you are paying taxes on the contributions upfront. There are always looming changes on the financial horizon that may make Roth plans more desirable. 

Namely, there is discussion of potential increases to tax rates that could force you into a higher tax bracket than you anticipated. By paying taxes on funds contributed to a Roth account today, you can secure your tax rate and enjoy distributions from that account fully tax-free in retirement. 

Navigate the Changes with an Expert Partner

The Secure 2.0 Act could have a significant impact on how you save for retirement and how you reap the rewards in your golden years, especially as the IRS continues to make adjustments in the years to come. The right team at your back can help you navigate changes like these as they arise to ensure that your wealth and retirement plans are completely secure. 

Here at Consilio Wealth Advisors, we specialize in financial planning and tax planning for high-income earners and can help you make financially-sound decisions regarding your future. Get strategic guidance, win the tax game, and achieve financial freedom – schedule a call with us today! 

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