Understanding catch-up contributions in 2024

Savers with 401(k) accounts will be facing a change in 2024. Current regulations allow individuals 50 years or older to make catch-up contributions each year. Eligible workers are allowed to add a catch-up contribution of up to $7,500 into their 401(k)s in 2023 for a total possible contribution of $30,000. In 2023, the extra $7,500 can be deducted from taxable income. Starting in 2024, if you earn more than $145,000 in 2023, you will only be allowed to invest the catch-up amount of $7,500 into a Roth account.

This change was part of new regulations passed in December 2022 that will take effect in 2024. Although this change will mean that the income tax will be higher in 2024 if you choose this alternative, in the long run, it will mean lower taxes later in retirement because any increase in value and dividends to the catch-up investment will be tax-free. These changes do not apply to IRA accounts. If you have an IRA account, you are allowed to contribute a catch-up amount up to $1,000 if you are 50 or older, in addition to the $6,500 annual limit.

Ed Slott (IRAhelp.com), an expert in retirement accounts, points out that the new requirement can be a “gift to high earners” who may otherwise overlook the advantages of the Roth account. However, under new retirement law, most non-spouse beneficiaries will have to liquidate traditional accounts and Roth accounts within 10 years after they inherit retirement accounts.

Some companies have indicated that they are not prepared to handle the change in time for 2024.

So, if you are planning to make catch-up contributions in 2024, you will have to verify that your company has established the Roth alternative. Not all companies that offer 401(k) accounts have established the Roth option yet.

Some states that offer 401(k) alternatives require new state legislation to offer Roth accounts. For example, South Dakota and Idaho are two states in which new legislation is required. So, if you have a 401(k) account as a state employee, you should verify with your human resources department whether you will be able to make catch-up contributions in 2024. If you are a union member, you should encourage your officers to take the necessary steps to ensure you can continue to make catch-up contributions.

Apparently, there was a drafting error in the retirement bill that Congress passed in 2022, which many attorneys specializing in retirement plans interpreted as prohibiting catch-up contributions in 2024. That was not the intention of the legislation.

Some members of Congress have written to the Treasury Department, indicating that Congress intends to introduce technical corrections to legislation to fix that problem. If you intend to make catch-up contributions in 2024, you should write to your congressional representative to make sure that these technical corrections are made.

Bottom line: If you are over 50, whether you contribute to a 401(k) or an IRA, it is to your advantage to make catch-up contributions if you have the assets to do so. If you plan on contributing to a 401(k) Roth account, contact your HR department to make sure your company will be able to do so. If you will be contributing to an IRA account, contact your congressional representative to ensure that Congress will be making technical corrections to the legislation on time so you can continue to make catch-up contributions in 2024.