A significant announcement made by the Internal Revenue Service (IRS) on August 25, 2023, has brought relief to numerous high-income earners and plan sponsors. Per IRS Notice 2023-62, The IRS postponed implementing a rule requiring age 50 catch-up contributions made by individuals earning over $145,000 in the prior year to be directed into after-tax Roth 401(k), 403(b), and governmental 457(b) accounts. This provision of the SECURE (Setting Every Community Up for Retirement Enhancement) 2.0 Act was initially scheduled to begin in 2024, but the IRS has extended the effective date to 2026. This was among 92 retirement-related provisions designed to enhance and simplify the retirement savings process for American workers as well as to generate much needed tax revenue through several Roth-related provisions.
The IRS’s decision to delay the implementation of mandatory Roth catch-ups for higher income earners until 2026 has been widely appreciated by both retirement plan sponsors and some high earning participants who look forward to the immediate tax deduction of pre-tax elective deferrals and catch-up contributions. The two-year extension to 2026 provides time for these high earners to continue making catch-up contributions on a pre-tax basis, if so desired, and to prepare for the impact that making such catch-up contributions on a Roth (non-deductible) basis will have on overall income tax planning.
The IRS also clarified that language that inadvertently eliminated catch-up contributions for all employees at any compensation level, if a Roth option was not permitted under the terms of the plan, was a technical error and will be corrected. For now, plan participants, including higher earners, age 50 and older, may continue to make catch-up contributions on either a pre-tax or Roth basis (if the plan offers a Roth option) through 2025.
Catch-up contributions serve as an effective retirement planning tool that permits individuals, aged 50 and over, to contribute additional dollars to their 401(k)s or similar workplace retirement accounts over the regular annual limits. Treating these catch-up contributions as Roth contributions means that they are made on an after-tax basis (no upfront deduction from income as would be the case if the contribution was made on a pre-tax basis); in exchange for foregoing the immediate tax deduction, future qualified Roth withdrawals would be tax-free, hedging the potential risk of future tax rate increases on overall retirement income.
While the IRS’s decision to delay the Roth requirement for catch-up contributions is welcome news, retirement savers and plan sponsors should continue to monitor developments closely. The IRS has indicated that additional guidance on the interpretation of Section 603 of the SECURE 2.0 Act will be issued in the future.
Given the complexities involved in retirement planning and the ever-evolving tax laws, individuals may benefit from the guidance of a financial advisor. These professionals can review existing retirement plans and provide tailored recommendations to optimize retirement savings while minimizing tax liabilities.
To read IRS Notice 2023-62, click here.
Heather has an exceptional talent for distilling complex financial concepts into easily understandable strategies and is a sought after speaker in her field. Her passion for education extends to her work with financial, tax, and legal professionals, equipping them with innovative strategies to help their clients transition into retirement confidently.
She is an industry expert with The American College of Financial Services' Knowledge Hub+ platform and a dedicated volunteer with the National Association for Fixed Annuities' Education committee, recognized for her outstanding contributions in annuity education with the NAFA Pillar Award in 2022. A resident of Woodstock, Georgia, Heather is a devoted wife and mother who enjoys spending time with her family, friends, and the great outdoors in her spare time.
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