What is the story about?
What's Happening?
A new rule under the Secure 2.0 retirement law will change the tax treatment of 401(k) catch-up contributions for high earners starting next year. Individuals over 50 who earn more than $145,000 in FICA wages will have their catch-up contributions treated as Roth 401(k) contributions, meaning they will be taxed upfront. This change eliminates the immediate tax deferral benefit previously available for these contributions. The rule affects those making catch-up contributions in 401(k), 403(b), 457(b), SEP, or SIMPLE IRA plans. While the majority of workplace retirement plans offer Roth 401(k) options, those without this option will not be able to make catch-up contributions.
Why It's Important?
The rule change impacts high earners by requiring them to pay taxes on catch-up contributions now, potentially at a higher rate during their peak earning years. This could reduce their take-home pay and alter retirement planning strategies. However, the change also offers benefits, such as tax-free growth and withdrawals from Roth 401(k) accounts, providing more flexibility in retirement. The rule reflects a shift towards encouraging Roth contributions, which could have long-term implications for retirement savings and tax planning.
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