If you have a 401K and are over the age of 50, you are able to make a catch-up contribution to your 401K. In 2024, there will be a change to the popular catch-up contribution. Heads up!
Catch-up Contribution Eligibility
The IRS defines a catch-up contribution this way. “A catch-up contribution is an elective deferral made by a participant age 50 or older that exceeds a statutory limit, a plan-imposed limit, or the actual deferral percentage (ADP) test limit for highly compensated employees (HCEs). Catch-up contributions may be made to a 401(k) plan, a 403(b) plan, a governmental 457(b) plan, a SARSEP, a SIMPLE-401(k) or a SIMPLE-IRA. See IRC Section 414(v) and Treas. Reg. Section 1.414(v)-1.
2023 changes for 401K annual contributions and catch-up contributions are as follows:
- The contribution limit for employees who participate in 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan will increase to $22,500.
- The limit on annual contributions to an IRA will increase to $6,500. The IRA catch‑up contribution limit for individuals age 50 and over is not subject to an annual cost‑of‑living adjustment and remains $1,000.
- The catch-up contribution limit for employees age 50 and over who participate in 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan will increase to $7,500.
- The catch-up contribution limit for employees age 50 and over who participate in SIMPLE plans will increase to $3,500, up from $3,000.
- The phase‑out ranges for deducting contributions to a traditional IRA will also increase. Taxpayers should review Notice 2022-55 regarding the details for their situation.
- The income phase-out range for people making contributions to a Roth IRA will increase for taxpayers filing as single, head of household and married filing jointly. Again, taxpayers should consult Notice 2022-55 for specifics about their situation.
- The income limit for the Saver’s Credit for low- and moderate-income workers is $73,000 for married couples filing jointly; $54,750 for heads of household; and $36,500 for singles and married individuals filing separately.
- The amount individuals can contribute to their SIMPLE retirement accounts will increase to $15,500.
- If you would like to subscribe to the IRS Tax Tips, here is their link: Subscribe to IRS Tax Tips
Image by Arek Socha from Pixabay
Changes for High Earners in 2024
A high earner is someone who earns over USD $145,000. In 2024, these earners will no longer be able to add their catch-up contributions to their pre-tax 401(k) account. They’ll have to go into an after-tax Roth account instead.
Motley Fool explains the difference between a 401K and a Roth401K. “Roth IRAs and Roth 401(k)s work the same tax-wise, but they have some key differences. First, the new rule change does not apply to Roth IRA catch-up contributions. If you’re eligible to contribute to a Roth IRA (it has income limits), you can make your $1,000 catch-up contribution.”
Bottomline
The catch-up contributions have been a benefit to people in higher tax brackets. A $7,500 catch-up contribution for someone in the 35% tax bracket would receive approximately a $2,625 tax deduction, while someone in the 24% bracket would get a $1,800 deduction.
The new changes could be more beneficial than originally thought. To be eligible for tax-free withdrawals from a Roth 401K, you must be 59 1/2 and you must have had your Roth account for at least five years.
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