IRS Announces Changes Impacting Catch-Up Contributions

The IRS announced Friday that it’s putting an administrative transition period in place until 2026 to extend the new requirement that catch-up contributions made by higher-income individuals participating in a 401(k) or similar retirement plan be treated as after-tax Roth contributions. The change delays the implementation of a rule that Congress approved last year as part of the Secure 2.0 Act.

Americans aged 50 and older have previously been able to make catch-up contributions to put extra cash into their retirement accounts above the contribution limit. For example, eligible savers can deposit a catch-up contribution of up to $7,500 into their 401(k) plans or other retirement accounts above the $22,500 cap in 2023.

Under the Secure 2.0 Act, which became law as part of a year-end appropriations package enacted by Congress in December 2022, the new catch-up contribution rule would require higher-income earners put their catch-up contributions in after-tax accounts subject to Roth rules.

The policy applies to individuals who earned more than $145,000 from a single employer in the prior year and to catch-up deposits into 401(k), 403(b) or 457(b) retirement plans. In effect, this means that higher-income earners wouldn’t receive the same tax break they’ve previously enjoyed once the Secure 2.0 changes are implemented because they wouldn’t be permitted to make pretax catch-up contributions, which reduce the size of the saver’s income subject to tax.

The IRS’ two-year delay allows savers to continue to make pretax catch-up contributions through 2025 as the agency implements the policy change. It also clarified that plan participants ages 50 and up can continue to make catch-up contributions after 2023 regardless of their income level.

“The administrative transition period will help taxpayers transition smoothly to the new Roth catch-up requirement and is designed to facilitate an orderly transition for compliance with that requirement,” the IRS said in the announcement.