The retirement plan world is breathing a sigh of relief after the IRS Friday announced a two-year delay on requiring high-income workers who make 401(k) catch-up contributions to do so in Roth accounts.
For months, plan sponsors had worried about a provision of the SECURE 2.0 Act slated to go into effect on Jan. 1, 2024, that will require the use of Roth 401(k) accounts for people with income of $145,000 or more who are 50 or older and thus eligible for catch-ups.
The problem: After-tax Roth 401(k) options today are uncommon — and adding that plan feature isn’t a matter of flipping a switch.
“The first hurdle was that many plans don’t have Roth options,” said Hailey Fields, a principal at retirement plan consultant Multnomah Group. “Those high-income earners essentially won’t have been able to make catch-up contributions, which was problematic.”
Because it’s easy for high-income workers to max out their pretax contributions before the end of a year, employers often use catch-ups for “spillover of regular contributions,” Fields said.
That system is simple, and adding the need to switch to Roth will complicate things, she said. “When you, on the exact penny, need to move a regular contribution into a catch-up contribution, you [will] need to have regular pretax and Roth in that payroll.”
Currently, the traditional pretax contribution limit is $22,500 annually, though catch-ups increase that by $7,500.
Another advisor, Kaci Skidgel, president of Summit Financial Group, had been preparing retirement plan clients for the 2024 deadline up until the IRS announcement late last week.
“It really was a race to the finish line,” Skidgel said. “Many of them were concerned that they couldn’t get it done … My clients are going to be
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