What's Happening?
The Internal Revenue Service (IRS) has finalized amendments to workplace 401(k) plans, mandating that catch-up contributions for individuals over the age of 50 be made as post-tax Roth deferrals. This regulation, part of the SECURE 2.0 Act enacted in 2022, allows older workers to contribute more to their retirement plans, provided these contributions are Roth deferrals. However, the rule does not require retirement plans to establish Roth accounts, leaving the decision to individual plan designs.
Why It's Important?
This regulatory change is significant for older workers seeking to maximize their retirement savings. By requiring catch-up contributions to be Roth deferrals, the IRS is encouraging tax diversification in retirement savings, which can offer tax-free growth and withdrawals. This could benefit individuals in higher tax brackets during retirement. Employers and plan administrators will need to adjust their systems to accommodate these changes, potentially impacting administrative costs and plan offerings.
What's Next?
Employers and plan administrators will need to review and possibly update their retirement plan offerings to comply with the new IRS rule. This may involve setting up Roth accounts if they are not already available. Workers over 50 should evaluate their retirement strategies to take advantage of the new catch-up contribution rules, considering the long-term tax implications of Roth deferrals.
