Higher earners just got a huge gift from the IRS which is extending pretax catch-up contributions for two years so they can put more into their retirement savings.
(Video Credit: CBS News)
The IRS issued a new ruling that delays changes to the policy through the end of 2025 regardless of income. This was done ostensibly to give employers more time to update their systems.
But it is also ostensibly a preventative measure to keep the 401(k) system from imploding. In the end, this is the government attempting to tax your 401(k) upfront rather than when you withdraw the money so they can finance their overspending. It’s that other way of making money for the Left.
As it stands now, “catch-up contributions” allow savers who are 50 years old and older to contribute an extra $7,500 into their 401(k) plans and other retirement plans beyond the employee deferral limit of $22,500 that was set for 2023, according to CNBC.
“A change enacted via Secure 2.0 would have eliminated the upfront tax break on catch-up contributions for higher earners by only allowing these deposits in after-tax Roth accounts, starting in 2024,” CNBC reported.
The IRS has delayed the income limitations for 401k catchup contributions until 2026. This means high income earners can still contribute the extra $7,500 as long as they’re 50 years old. Read more: https://t.co/44zrbqUNFJ #tax #savings #retirement pic.twitter.com/VVEjuh2CFj
— Ren Cicalese III CPA (@R3CPA) August 29, 2023
“But the IRS on Friday announced a two-year delay for the change, meaning savers can still make pretax catch-up contributions through the end of 2025, regardless of income,” the media outlet continued.
“The administrative transition period will help taxpayers transition smoothly to the new Roth catch-up requirement,” the IRS noted in a statement that really doesn’t give the full explanation for all of this chicanery to tax the so-called rich.
Many people do not pay attention to their 401(k) plans until they want to pull money from them. Then they get the shock of paying taxes on their hard-earned money. The two-year delay is a very good thing for those contributing to those accounts but after that, higher-earning Americans are going to get hit hard in their retirement wallets and will receive an even nastier shock.
“The Secure 2.0 change applies to employees making catch-up deposits to 401(k), 403(b) or 457(b) plans who earned more than $145,000 from a single company the prior year,” CNBC noted. “Some 16% of eligible employees took advantage of catch-up contributions in 2022, according to a recent Vanguard report based on roughly 1,700 retirement plans.”
IRS delays change for 401(k) catch-up contributions. Here’s what higher earners need to know https://t.co/AGYzMxcdsO
This entire concept is backwards… The IRS should incentivize saving more at a younger age. The 401k contribution limit should be raised significantly.
— FinTechExec (@FinTechExec12) August 28, 2023
The delay followed approximately 200 organizations sending a letter to Congress in July requesting additional time to implement the 401(k) changes.
Diann Howland, vice president of legislative affairs for the American Benefits Council, said in a statement on Friday that retirement plan sponsors are grateful for the agency’s “critically important relief.”
“Without this additional compliance period, a vast number of plans and employers would not have been able to comply with the new requirement and likely would have had to suspend catch-up retirement contributions,” she contended.
Dan Galli, a Norwell, Massachusetts-based certified financial planner and owner of Daniel J. Galli & Associates, commented that the delay for two years is “a very good thing” for retirement plan administrators.
Man, this administration has not missed one single trick to dig into the citizens pockets to get cash for their bloated government.
— Thomas Langlie (@langlie_thomas) August 29, 2023
“There’s no way to do this right without a couple of years of preparation,” he remarked.
Galli also pointed out that despite higher earners having an extra two years for pretax catch-up 401(k) contributions, some may still consider after-tax deposits due to impending income tax law changes.
“This really coincides well with the changing tax brackets coming in 2026,” he asserted.
A number of provisions from the Tax Cuts and Jobs Act, including lower individual tax rates, will sunset after 2025 if Congress does not intervene.
That was not a hurricane you just felt, it was a collective sign of relief from every payroll provider and TPA in the country.
— 401kAnswersNow (@401kAnswersNow) August 25, 2023
“While pre-tax 401(k) contributions provide an upfront tax break, after-tax Roth deposits allow funds to grow and be withdrawn in retirement tax-free. And with possible tax hikes on the horizon, it may make sense for some investors to pay taxes now,” CNBC stated, overlooking the front-loading of taxation by the Biden administration.
“What we’re doing with clients right now is trying to leverage the lower tax brackets for as long as we can,” Galli ominously concluded.
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