Secure 2.0 catch-up Roth 401K

[Grogs]

Question, if my catch-up contributions go into a Roth 401k. Is there any impact to contributions for my Roth IRA?

The only way I could see that happening is if you are near the limit to direct contribute to a Roth IRA and go over due to AGI increasing from 401K catch up switching to Roth. Otherwise, they are two separate things with separate limits. Contributing to a Roth 401K doesn't reduce what you can put in a Roth IRA.

Question, if my catch-up contributions go into a Roth 401k. Is there any impact to contributions for my Roth IRA?

IMHO, no.

Thank you for the answers. I am going to have to estimate to see if our AGI will push us over the Roth IRA limit now

You can still do a backdoor Roth unless maybe you have significant Traditional IRA assets. If you think there's even the slightest chance you'll be over the income limit, then backdoor if you're able. If you're not able to backdoor, then I would recommend you wait until you're certain you won't exceed the limit before contributing to a standard Roth. I didn't backdoor in 2021 and fixing the mess cost me some additional tax, plus a lot of aggravation.

[Harri88]

Question, if my catch-up contributions go into a Roth 401k. Is there any impact to contributions for my Roth IRA?

The only way I could see that happening is if you are near the limit to direct contribute to a Roth IRA and go over due to AGI increasing from 401K catch up switching to Roth. Otherwise, they are two separate things with separate limits. Contributing to a Roth 401K doesn't reduce what you can put in a Roth IRA.

Question, if my catch-up contributions go into a Roth 401k. Is there any impact to contributions for my Roth IRA?

IMHO, no.

Thank you for the answers. I am going to have to estimate to see if our AGI will push us over the Roth IRA limit now

You can still do a backdoor Roth unless maybe you have significant Traditional IRA assets. If you think there's even the slightest chance you'll be over the income limit, then backdoor if you're able. If you're not able to backdoor, then I would recommend you wait until you're certain you won't exceed the limit before contributing to a standard Roth. I didn't backdoor in 2021 and fixing the mess cost me some additional tax, plus a lot of aggravation.

Thank you, a few items for us to consider.

[worthit]

Interesting. So is this better than the pre-tax contributions for those high earners who otherwise would get a tax deduction?

In a word, no. High earners are better off getting the tax break.

Yes; tax break better for sure. With tax break reduced, more Roth opportunities with great administrative simplicity as more plans make this maneuver easy a slight consolation prize.

Thanks both.

[Hzgray]

I am retired military and work for the Federal Gov’t. Does my military retirement pension reported on a 1099r count towards the $145k wage limit?

[Alan S.]

I am retired military and work for the Federal Gov’t. Does my military retirement pension reported on a 1099r count towards the $145k wage limit?

No, just your W-2 Box 5.

[bhburnsy]

So been researching this and haven't seen how this would work with an employee who has multiple employers during the preceding year.

[bhburnsy]

So been researching this and haven't seen how this would work with an employee who has multiple employers during the preceding year.

Found it. This really wasn't thought through, I know a close family member working 2 jobs making +200K but neither job exceeds $145K so this person can keep making the extra contribution.

Wages With The Same Employer

When the Secure Act 2.0 mentions the $145,000 wage limit, it refers to wages in the previous calendar year from the “employer sponsoring the plan”. So it’s not based on your W2 income with any employer but rather your current employer. If you made $180,000 in W2 income in 2023 from XYZ Inc. but then you decide to switch jobs to ABC Inc. in 2024, since you did not have any wages from ABC Inc. in 2023, there are no wages with your current employer to assess the $145,000 threshold which would make you eligible to make your catch-up contributions all in pre-tax dollars to ABC Inc. 401(K) plan for 2024 even though your W2 wages with XYZ Inc. were over the $145,000 limit in 2023.

This would also be true for someone that is hired mid-year with a new employer. For example, Sarah is 54 and was hired by Software Inc. on July 1, 2024, with an annual salary of $180,000. Since Sarah had no wages from Software Inc. in 2023, she would be eligible to make her catch-up contribution all in pre-tax dollars. But it gets better for Sarah, she will also be able to make a pre-tax catch-up contribution in 2025 too. For the 2025 plan year, they look back at Sarah’s 2024 W2 to determine whether or not here wages were over the $145,000 threshold, since she only works for half of the year, her total wages were $90,000, which is below the $145,000 threshold.

If Sarah continues to work for Software Inc. into 2026, that would be the first year that she would be forced to make her catch-up contribution to the Roth source because she would have had a full year of wages in 2025, equaling $180,000.

[Grogs]

So been researching this and haven't seen how this would work with an employee who has multiple employers during the preceding year.

Found it. This really wasn't thought through, I know a close family member working 2 jobs making +200K but neither job exceeds $145K so this person can keep making the extra contribution.

Wages With The Same Employer

When the Secure Act 2.0 mentions the $145,000 wage limit, it refers to wages in the previous calendar year from the “employer sponsoring the plan”. So it’s not based on your W2 income with any employer but rather your current employer. If you made $180,000 in W2 income in 2023 from XYZ Inc. but then you decide to switch jobs to ABC Inc. in 2024, since you did not have any wages from ABC Inc. in 2023, there are no wages with your current employer to assess the $145,000 threshold which would make you eligible to make your catch-up contributions all in pre-tax dollars to ABC Inc. 401(K) plan for 2024 even though your W2 wages with XYZ Inc. were over the $145,000 limit in 2023.

This would also be true for someone that is hired mid-year with a new employer. For example, Sarah is 54 and was hired by Software Inc. on July 1, 2024, with an annual salary of $180,000. Since Sarah had no wages from Software Inc. in 2023, she would be eligible to make her catch-up contribution all in pre-tax dollars. But it gets better for Sarah, she will also be able to make a pre-tax catch-up contribution in 2025 too. For the 2025 plan year, they look back at Sarah’s 2024 W2 to determine whether or not here wages were over the $145,000 threshold, since she only works for half of the year, her total wages were $90,000, which is below the $145,000 threshold.

If Sarah continues to work for Software Inc. into 2026, that would be the first year that she would be forced to make her catch-up contribution to the Roth source because she would have had a full year of wages in 2025, equaling $180,000.

I believe the highly compensated employee (HCE) rule works the same way, i.e., per job. I wouldn't necessarily say it isn't well thought out. If you do it on total income from other jobs, then company A isn't going to know about your income from company B. That would leave it up to the individual to know what their total W2 income (not AGI, and not displayed anywhere on the 1040 AFAIK) for the previous year and make sure they know to switch to Roth contributions on the catch-up. So in the big scheme of things, a small percentage of people being able to do Traditional catch-ups despite a high income is probably less harmful than a similar number of people getting hit with extra taxes and penalties when they discover they made the wrong type of contributions a year or more down the road.

[Xrayman69]

[Thread merged into here --admin LadyGeek]

The catchup retirement contributions for those over 50 will be taxed for high earners up to the 7500 max, and thus making this portion a ROTH contribution. I already have been opting for the voluntary ROTh IRA contibution.

[LadyGeek]

I merged Xrayman69's thread into the ongoing discussion.

(Thanks to the member who reported the post and provided a link to this thread.)

The catchup retirement contributions for those over 50 will be taxed for high earners up to the 7500 max, and thus making this portion a ROTH contribution. I already have been opting for the voluntary ROTh IRA contibution.

Roth is not an acronym. It's the name of a US senator. See: Roth IRA

Named after US Senator William Roth, Roth IRAs were established by the Taxpayer Relief Act of 1997.

[chazas]

I am wondering if this new Act allows the match I get into my 401K, can I direct those funds to my workplace Roth 401k instead? Currently contribute to the 401k, but in the past contributed to the Roth 401k.

Starting in 2024, not 2023.

Or maybe in 2026! A very large group of interested organizations have requested the IRS to delay this provision and all of its many challenges for 2 more years.

s://www.asppa.org/news/where-we-are-roth-ca ... -provision

Yet another request for a 2 year extension to the 2024 effective year:

https://www.eric.org/wp-content/uploads ... -Final.pdf

I don't see how the IRS can avoid granting at least a 1 year delay. If they don't they will be under tremendous pressure to resolve all of the many issues with this provision.

As someone who routinely writes comment letters on proposed rules for other government agencies on behalf of very large industry groups, sometimes they just don't care how difficult they make things.

[THY4373]

I'll be impacted by this and since I have had access to a mega-backdoor Roth for years I don't really need more Roth savings. In fact this year I cut back entirely on my MBR because I felt I was getting too heavy on retirement assets vs non-retirement assets. Assuming no delay in implementation I'll drop doing catch up contributions to redirect the money elsewhere. At least a got a few years under the old system.

[iim7V7IM7]

My company’s current plan for 2023 has traditional and Roth 401k options. For 2023, the $22,500 (tax deferred) and $7,500 (tax deferred catch-up) are in place. My company provides a 4.5% company match which today is only tax deferred. Like someone earlier illustrated in a prior post, we can also contribute after tax dollars that are set up in kind for Roth mega backdoor conversion. All contributions combined for 2023 are limited to $73,500/year. I take advantage of this benefit and I am fortunate to be able to max it out.

We have heard nothing from HR or Fidelity who manages our plan regarding next year. I suspect in October when many companies begin open enrollment whether Secure 2.0 as written goes into place next year or is deferred to allow for broad transitional implementation will be known. The government basically wants our money now with catch-up contributions for incomes > $145k. I suspect my traditional 401k and company match can still be tax deferred, but catch-up and after tax will all be taxed at my current high tax rate.

I am 62 and plan on working another 3-4 years. If Secure 2.0 gets implemented, it will basically increase my taxable income based upon whatever the company match limit is for 2024 and beyond. I will be paying at a higher tax rate than I will during retirement when tax deferred money is withdrawn. Fortunately, the push out of RMD to age 75 may help with ROTH conversions depending on what happens with tax policy.

[hamhocs]

Yay, delayed 2 more years until Tax Year 2026

https://www.irs.gov/pub/irs-drop/n-23-62.pdf

[Artsdoctor]

Yay, delayed 2 more years until Tax Year 2026

https://www.irs.gov/pub/irs-drop/n-23-62.pdf

Incredible that we found it so quickly. Certainly gives everyone some breathing room.

[Eno Deb]

Pheeww. Two more years of tax savings.

[stan1]

Yay, delayed 2 more years until Tax Year 2026

https://www.irs.gov/pub/irs-drop/n-23-62.pdf

Isn't it an issue for employers more so than taxpayers? It's quite a bit of additional plan administration logic that needs to be developed and validated.
Or is that just how the IRS writes these types of Notices by referring to the taxpayer as individuals as well as employers/businesses?

[Alan S.]

Yay, delayed 2 more years until Tax Year 2026

https://www.irs.gov/pub/irs-drop/n-23-62.pdf

Isn't it an issue for employers more so than taxpayers? It's quite a bit of additional plan administration logic that needs to be developed and validated.
Or is that just how the IRS writes these types of Notices by referring to the taxpayer as individuals as well as employers/businesses?

It's a huge issue for plan administrators, the IRS, and taxpayers who do any tax planning. The W-2 instructions will have to be updated with respect to coding the Roth catch up contributions and to incorporate the taxable income they generate. Issues that the IRS is requesting comments on are a small portion of the issues that require IRS Regs and guidance.

Plan recordkeeping fees will likely rise not only due to Sec 603, but also for the many other new provisions incorporated into Secure 2.0, some of which will be mandatory and others optional. Most likely small employers will choose not to incorporate many of the optional provisions, at least until there is sufficient employee demand for them.

Most likely the lobbyists who create these added provisions do not have a clear picture of the costs and complexity of implementation v. the benefits. Sec 603 is all about generating additional tax revenue in the 10 year budgeting window Congress uses. The complexity of Sec 603 just cost the erased the first two years of the additional tax revenue.

[wellboy99]

[Thread merged into here --admin LadyGeek]

https://401kspecialistmag.com/irs-comes ... ion/?amp=1

https://news.bloomberglaw.com/daily-lab ... secure-2-0

This is great news with 2 year grace period.

[iim7V7IM7]

So if I understand the delay to 2026 the $145,000/year income threshold on tax deferred catch-up contributions will not come into effect until 2026? So I can plan for 2024 and 2025 catch-up contributions remaining tax deferred?

I had read that the regular threshold might increase from $22,500/year to $23,000/year but the $7,500/year catch-up contributions would remain the same for 2024. I think the “official” word will come in October.

https://401kspecialistmag.com/500-boost ... the%20same.

[OuterBanks]

The $145,000/year income threshold is also adjusted higher every year with inflation so by 2026 the threshold amount could be quite a bit higher.

[LadyGeek]

I merged wellboy99's thread into the ongoing discussion.

(Thanks to the member who reported the post and provided a link to this thread.)

[bhburnsy]

[Thread merged into here --admin LadyGeek]

https://www.irs.gov/newsroom/irs-announ ... after-2023

Today, the Internal Revenue Service announced an administrative transition period that extends until 2026 the new requirement that any catch-up contributions made by higher‑income participants in 401(k) and similar retirement plans must be designated as after-tax Roth contributions.

At the same time, the IRS also clarified that plan participants who are age 50 and over can continue to make catch‑up contributions after 2023, regardless of income.

[LadyGeek]

I merged bhburnsy's thread into the ongoing discussion.

(Thanks to the member who reported the post and explained what's wrong.)