New Rule Will Now Go Into Effect in 2026
Saving for retirement is an important part of a healthy financial plan. Whether you have an individual retirement account or an employer-sponsored plan, the Internal Revenue Service (IRS) has incentives to help you make the most of your retirement accounts as you work to meet your savings goals. These incentives come in the form of tax deductions and credits. As you get closer to retirement age, the IRS has allowed for contributions to your savings plans to increase. This starts at age 50 with catch-up contributions.
2023 Contribution Limits
- 401(k), 403(b), 457(b) and Roth 401(k) plans have elective deferral limits of $22,500. If you are age 50 or older, you may make an additional catch-up contribution of $7,500.
- SIMPLE plans have elective deferrals of $15,500. Those age 50 or older can make an additional catch-up contribution of $3,500.
- Traditional IRA and Roth IRA contribution limits are $6,500. If you are age 50 or older, you can make an additional catch-up contribution of $1,000.
Changes That Came With the Secure 2.0 Act
The Secure 2.0 Act of 2022 was signed into law as a follow-up to 2019’s SECURE Act. Together this legislation included major changes to retirement planning that were designed to help individuals save more.
Under the Secure 2.0 Act’s rules, beginning in 2024, individuals who earned more than $145,000 from a single company the prior year could not get a deduction for catch-up contributions made to their 401(k), 403(b) or 457(b) plan. Instead, catch-up contributions would be required to be made to the Roth portion.
However, the start date of this provision of the new tax law has now been pushed back by 2 years.
Why is the start date changing?
Basically, it’s because some retirement plans don’t have Roth provisions and plan providers can’t get everything updated before year-end. With the new rule’s 2024 effective date rapidly approaching, employers and program managers warned it was not enough time for “setting up a system that would funnel high income employees into only making Roth catch-up contributions” and petitioned Congress to ask for the effective date of the changes to be deferred. In response, the IRS agreed to provide a two-year “administrative transition period” and the rule will now go into effect on January 1, 2026.
Taking Advantage of This Planning Opportunity
If you can contribute to your 401(k), 403(b) or 457(b) plan, are age 50 or older and earn annual compensation of over $145,000 from a single company, this change would have affected you. The good news is that you now have additional flexibility in 2024 and 2025. You can opt for your catch-up contributions to your 401(k), 403(b) or 457(b) to be either a pre-tax contribution or a post-tax (Roth) contribution. Starting in 2026, it can only be a post-tax (Roth) contribution.
Retirement planning is not one-size-fits-all. There are many options available to those who are working hard to plan for their future. If you have questions about the most efficient ways to save for your retirement or how these tax law changes might affect you, please contact us.