What to Know about the New 401(k) Catch-up Contribution Rules

As you approach retirement, it’s natural to want to look for ways to try to maximize your retirement savings. One such strategy, the catch-up contribution, has previously allowed individuals aged 50 and over to contribute more to their retirement accounts beyond the standard limits. Recent changes in federal laws, particularly those made in the SECURE 2.0 Act, have introduced new catch-up contribution rules for high-income earners.

As of 2024, individuals who earn more than $145,000 per year will be required to make their catch-up contributions to Roth 401(k) accounts rather than traditional 401(k) plans, marking a significant shift in how retirement savings are taxed and managed. 

For high-net-worth individuals, staying abreast of these changes can mean the difference between taking advantage of tax-efficient retirement strategies and losing retirement income to an unnecessarily high tax burden.

What is a catch-up contribution?

Catch-up contributions are designed to help individuals aged 50 or older save more for retirement by allowing them to contribute beyond the standard annual limits set for retirement accounts like 401(k)s and IRAs. 

In 2024, the contribution limit for a traditional 401(k) is $22,500. Individuals aged 50 and older can contribute an additional $7,500, known as a catch-up contribution, bringing the total potential annual contribution to $30,000.

The rationale behind catch-up contributions is straightforward: as people near retirement, they may realize they haven’t saved enough during their earlier working years. Perhaps life events, like raising children or unexpected medical expenses, prevented them from maximizing their retirement contributions earlier. Catch-up contributions then offer a window of opportunity to accelerate savings in the final decade or two of one’s working life.

Are catch-up contributions a good idea?

For many individuals, catch-up contributions can be an excellent way to build a more secure retirement fund. The primary benefit is that they allow you to bolster your retirement savings when you may be in your peak earning years. In fact, some people wait until their 50s to focus on retirement savings, using catch-up contributions as a way to play financial catch-up.

One key advantage of catch-up contributions is that they offer a higher contribution limit, which can be especially beneficial if you have more disposable income later in life. For example, with the standard contribution limit set at $22,500 in 2024, an additional $7,500 can be a significant boost to your retirement account, especially when combined with compound interest and market growth over the years.

Continue reading: Where’s the best place to put retirement savings?

Do catch-up contributions reduce taxable income?

Catch-up contributions have traditionally been a way to lower taxable income because contributions to traditional 401(k) accounts are made with pre-tax dollars. This means that the amount you contribute to your retirement account is deducted from your gross income, reducing the amount of income subject to taxes in that year.

For example, if your salary is $150,000 and you contribute $22,500 to your 401(k), your taxable income is reduced to $127,500. If you’re eligible for catch-up contributions and contribute an additional $7,500, your taxable income drops even further, to $120,000. This reduction can be beneficial for individuals in higher tax brackets, as it can offer immediate tax savings.

However, as of 2024, high earners (those earning more than $145,000 annually) will face a new rule under the SECURE 2.0 Act: catch-up contributions for these individuals must be made to a Roth 401(k) account. Contributions to Roth accounts are made with after-tax dollars, meaning they do not reduce your taxable income in the year the contribution is made.

While this change eliminates the immediate tax break, Roth accounts offer tax-free growth and withdrawals in retirement, which can be advantageous in the long term even if it changes the tax incentives in the present.

Learn more about how to reduce taxable income for high earners

What are the rules for 401(k) catch-up contributions?

The rules surrounding 401(k) catch-up contributions have changed over the years, and the latest changes mark a significant shift for high earners:

• Standard 401(k) limits: In 2024, the standard contribution limit for 401(k) plans is $22,500. If you’re 50 or older, you’re eligible to contribute an additional $7,500 as a catch-up contribution, bringing the total annual limit to $30,000. These limits may be adjusted annually to account for inflation.
• Roth 401(k) requirements for high earners: As of 2024, individuals earning more than $145,000 in the previous year (indexed for inflation) will be required to make catch-up contributions to a Roth 401(k) instead of a traditional 401(k). This change means that high-income individuals will no longer receive the immediate tax benefit of reducing their taxable income with catch-up contributions, as Roth contributions are made with after-tax dollars. However, the benefit comes during retirement since Roth withdrawals are tax-free.
• Employer matching: If your employer offers matching contributions, they will continue to do so, regardless of whether you contribute to a traditional or Roth 401(k). However, employer contributions will always be made to a pre-tax account, even if your catch-up contributions go to a Roth 401(k).
• Multiple 401(k) plans: If you contribute to more than one 401(k) plan, the total amount of contributions (including catch-up) cannot exceed the limit for the year. For example, if you have two 401(k) accounts and are over 50, your combined contributions cannot exceed $30,000 in 2024.
• Catch-up contributions for low earners: Individuals earning less than $145,000 annually are not required to make their catch-up contributions to a Roth 401(k). They can still choose between traditional pre-tax contributions or Roth contributions, depending on their tax strategy.

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How do you take advantage of catch-up contributions? Start by calling Avidian.

To fully take advantage of catch-up contributions, you should have a well-rounded strategy that considers both your current financial situation and long-term retirement goals. Here are a few steps to make the most of catch-up contributions:

• Evaluate your retirement accounts: Review your 401(k) and other retirement accounts to determine how much you’re contributing and whether you’re maximizing the available limits. If you’re 50 or older, make sure you’re taking full advantage of the catch-up contribution limits.
• Consider your tax strategy: For individuals earning more than $145,000, the requirement to make Roth 401(k) catch-up contributions may change your tax planning strategy. Since Roth contributions don’t provide an immediate tax break, you may need to consider other strategies for reducing your taxable income in the current year.
• Monitor employer matching: If your employer offers matching contributions, make sure you’re contributing enough to receive the full match. Employer contributions can significantly boost your retirement savings.

Navigating the new catch-up contribution rules and retirement planning for high-net-worth individuals can feel overwhelming at times. Working with a financial advisor can help you create a personalized strategy that maximizes the benefits of catch-up contributions while balancing tax considerations.

Catch-up contributions can play a crucial role in building a secure financial future — don’t miss the opportunity to make them work for you. To learn more about how you can better optimize your retirement savings strategy, reach out to Avidian Wealth Solutions. Our advisors can help you navigate the new rules and develop a plan tailored to your unique financial situation and retirement goals. 

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