In December 2022, Congress passed the SECURE 2.0 Act, introducing significant changes to 401(k) catch-up contributions that will affect older workers. Here’s what you need to know:
1. Loss of initial tax break
Starting in 2026, those earning over $145,000 annually won’t be able to make catch-up contributions to traditional 401(k) plans. Instead, these contributions must go to Roth 401(k)s, altering the tax advantages.
2. Reduced tax savings
This shift means older, high-earning workers will receive reduced tax savings. Contributions to Roth 401(k)s will be taxed differently, impacting take-home pay.
3. Long-term savings benefits
While you’ll miss the immediate tax benefit, catch-up contributions to Roth 401(k)s grow tax-free. A future rise in tax rates won’t affect these funds.
4. Implementation delay
Originally set for 2024, the new rules will now begin in 2026 due to concerns over the rapid transition. Delays or policy changes may occur before the 2026 deadline.
Preparing for the changes
Thorough education and professional advice are crucial to understanding these complex changes. Seek guidance from your Signet financial advisor to tailor a retirement strategy to your unique situation.
The SECURE 2.0 Act brings significant alterations to retirement savings, emphasizing the importance of informed planning and preparation.