Dave Danic, Director of Tax at Summit Virtual CFO by Anders, has an update on 401K Catch-up Contributions.
Hello, my name is Dave Danic, and I am the Director of Tax Services of Summit Virtual CFO by Anders. Today I want to make you aware of a rule starting in 2024 regarding catch-up contributions in a 401K plan. For the longest time, tax payers over 50 have been able to make catch-up contributions, which is an additional amount over the regular contribution amount into a 401K plan. In 2024, it's $7,500. But in 2020, It has to go into a Roth 401K account. This is different when you had the option to put it into a traditional 401K account, which was nice because you got a tax deduction for that contribution. And that was about, $2,500 of tax savings. In 2024, when it goes into the Roth, it's after tax. So you're actually losing that current near deduction of $2,500. It's not all a bad thing. While some, may be disappointed of losing the tax deduction, now there is a bucket of retirement funds that is after tax contributions, which means it grows tax-free and can be withdrawn tax-free within retirement. So, I'm okay with this. You have two buckets now, some which are pre-tax contribution and some which are after tax contributions. So, when you start withdrawing the money after retirement, some will be taxable, some will be non-taxable. So, what do you need to do if you're over 50 and used to making those catch-up contributions? The first one is to be prepared to know that your tax bill may go up because you're losing that catch-up contribution deduction. The second item is to call your 401K processor to make sure that they are ready for this rule. So, as you start making those catch-up contributions in 2024, they are ready to put that into the Roth 401K bucket. I hope this helps. Thank you. And if you have any questions, feel free to give us a call, and then we'll help you navigate this new rule change.