What to Know About Catch-Up Contributions

SECURE 2.0 requires higher earners to put their catch-up retirement savings in a Roth 401(k)—but not until 2026.

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For higher-income workers aged 50 and over who want to make extra “catch-up” contributions to employer-sponsored retirement plans, the rules have changed. But they won’t take effect until 2026.

As a reminder, workers aged 50 and older can contribute an extra $7,500 to their accounts after they’ve hit this year’s $22,500 annual contribution limit. Starting in 2026, though, 50-plus savers will be divided into two groups: Those making less than $145,000 can continue making catch-up contributions to their regular pre-tax 401(k)s. Those making $145,000 or more will have to put their catch-up dollars in a Roth 401(k)—which means those contributions will be after-tax, though their withdrawals in retirement will be tax-free.

This change was initially supposed to have taken effect in 2024, which could have been a problem for those without access to a Roth 401(k). However, the IRS then decided to grant a two-year reprieve, giving savers, employers, and retirement plan administrators more time to prepare. As a result, all plan participants over age 50 will be allowed to continue making catch-up contributions to their regular tax-deferred 401(k)s for the next two years, regardless of income.

Depending on your goals, this delay could be great news or a bit of a letdown. On one hand, having to characterize your catch-up contributions as Roth contributions would mean giving up some of the up-front tax benefits on regular 401(k) contributions. On the other, savers who don’t have a Roth 401(k) today might have been looking forward to having one next year.

So, if your strategy is to make the most of your pre-tax savings, congratulations! You’ve got two more years to do so. But if you were looking forward to diversifying your savings by tax treatment with a Roth, you might have to get creative. Here are some ideas.

Diversifying savings

The following options may not be as simple as automated catch-up contributions to your existing accounts, but they can help you get closer to where you want to go. 

Consider contributing your catch-up amount to a Roth IRA

Assuming your income is under the IRS threshold, you could set aside the value of your catch-up contribution to a Roth IRA For 2023, the annual maximum IRA contribution is $7,500—including a $1,000 catch-up contribution—if you’re 50 or older. Note that in the past, catch-up contribution levels for IRAs did not change, but under SECURE Act 2.0 they will be indexed to inflation beginning in 2024.

Consider a Roth Conversion

If you make too much to use a Roth IRA, you could also consider a backdoor Roth conversion. You’ll need to have a traditional IRA and a Roth IRA to make this work. First, you make after-tax contributions up to the annual maximum to the traditional IRA (make sure to file IRS Form 8606 every year you do this). Then, transfer the assets from the traditional IRA to the Roth IRA. You can make this transfer and conversion at any point in the future.

The conversion triggers income tax on any appreciation of the after-tax contributions—but once in the Roth IRA, earnings compound tax-free. Earnings distributed from the Roth IRA are tax-free as well, as long as you are 59½ and have held the Roth for at least five years (note that each conversion amount is subject to its own five-year holding period as it relates to tax-free withdrawals).

If you have no other IRAs, figuring out the tax due will be simple. However, it can be more complicated if you have other IRAs. The IRS’ pro-rata rule requires you to include all of your traditional IRA assets—that means your IRAs funded with pretax (deductible) contributions as well as those funded with after-tax (nondeductible) contributions—when figuring the conversion’s taxes. Then, you pay a proportional amount of taxes on the original account’s pretax contributions and earnings.

Say you contribute $6,000 to a nondeductible traditional IRA. You also have a rollover IRA worth $94,000 from a previous 401(k) made with pretax contributions. In this case, 94% of any conversion would be taxable. Here’s the math:

  • Total value of both accounts = $100,000
  • Pretax contributions = $94,000
  • After-tax contribution: $6,000
  • $6,000 ÷ $100,000 (expressed as percentage) = 6.0%
  • $6,000 (the amount converted) x 6.0% = $360 tax-free
  • $6,000 - $360 = $5,640 subject to income tax

Although this strategy has existed for many years, the IRS hasn’t weighed in on it definitively, so it’s highly recommended that you work with a professional accountant or tax advisor.

Save more in your traditional brokerage account

You may be tempted to overlook your taxable brokerage account, but don’t let the name fool you: Taxable accounts can be pretty tax efficient if you’re careful. There’s no up-front tax break, and income is taxed in the year you recognize it. But if you hold assets for more than a year, your gains may qualify for a long-term capital gains tax rate that is lower than your regular income tax rate. Qualified dividends can also benefit from the lower capital gains tax rates. Tax-efficient investments (like certain municipal bonds) may also offer tax benefits. In addition, losses may be deductible and can be used to reduce your taxable income through a process known as tax-loss harvesting. And unlike with some tax-advantaged accounts, the IRS won’t restrict contributions, withdrawals, or how you spend the money.

Looking ahead

The new catch-up rules won’t be here for another couple years, but you still have options for saving more. Think of it this way: There’s no reason not to make your own catch-up contributions to an IRA or taxable account now.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

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