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IRS Delays 401(k) Catch-Up Rules

The IRS recently issued guidance that they are delaying new Roth 401k catch-up rules. At the end of last year, in December of 2022, the Secure Act 2.0 put into effect new restrictions on catch-up contributions for high income earners. These contributions are for individuals over age 50 who want to put more into their 401k(s) or retirement plans.

Bonds to balance risk

Based on the new law, an individual is considered a high income earner if their Social Security wages were in excess of $145,000 for the prior year. This is an amount that most families in Northern Virginia and DC would mostly likely not describe as "high income", due to local costs of living.

This new change is not good for investors and savers in that it's restricting the potential types of contributions certain individuals can make. If income was above the limit, these contributions can only be made on an after-tax basis, precluding your ability to take a tax deduction.

This is especially impactful for those in high-income tax brackets, such as the 35% or 37% tax brackets. But it also can be very meaningful for those in moderate tax brackets as well. As well anyone who may be not able to take advantage of this deduction who is in a higher tax bracket now then they will be in retirement.

Losing the ability to put those extra funds and take a tax deduction now may be detrimental to your tax savings, growth, and progress towards financial independence. This change was coming kind of quick, so the IRS delaying the rule until 2026 is good news for many. Allowing families to can continue to take advantage of this strategy and making it all the more impactful this coming year.


GuidePoint Financial Planning - Reston Financial Planning

Ryan Phillips, CFA, CFP® is the founder of GuidePoint Financial Planning. He is passionate about helping busy families plan, save, and invest for their financial future. Contact him today if you are interested in learning more about the benefits of working with a fee-only (no-commission) financial planner.

All material above is for educational purposes only and is no way a recommendation to buy or sell investment securities. You should always review investment changes with qualified professionals. The data referenced is very short-term in nature and is used for educational means.

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