Breaking Down the Big Change Coming to Your 401(k)

The New Rules

Last December, Congress passed a new set of rules regarding catch-up contributions for retirement accounts.

In the past, savers 50 years and older were allowed to make catch-up contributions of up to $7,500 to their 401(k) accounts. Under the new rules, people who earned more than $145,000 the previous year will only be allowed to make catch-up contributions to Roth accounts, not 401(k)s.

In 2022, roughly 16% of retirement savers took advantage of catch-up contributions, according to Vanguard.

Roth Account Benefits

Since catch-up contributions will only be allowed in Roth accounts from now on, many companies are scrambling to make Roth retirement accounts available for their employees, in addition to 401(k)s.

This rule change means that some high-earning Americans will pay more in taxes. However, financial advisers are adamant that there are still plenty of benefits to making catch-up contributions to a Roth account, since the money can be withdrawn tax-free.

Additionally, these changes won’t apply to Individual Retirement Accounts (IRAs), which, in 2023, will allow a catch-up contribution of $1,000 – in addition to the $6,500 annual limit – for savers 50 years and older.

The Bottom Line

For years, making catch-up contributions to a 401(k) was a big tax-saver for high-earners. For example, if someone paid a tax rate of 35% then they could save $2,625 on their taxes when they made a catch-up contribution of $7,500 to their 401(k). Put another way, they could simultaneously reduce their tax bill while also investing money for retirement.

This rule change will eliminate this tax trick, since they’ll now have to pay taxes up-front during high earning years as opposed to in lower-earning retirement years.

Regardless of age or income level, it’s always important to stay aware of major legislation changes like this one, which will change how many Americans plan for retirement.

Looking for more stories like this? Check out On the Money — SoFi’s one-stop-shop for news, trends, and tips!

Check it out

Please understand that this information provided is general in nature and shouldn’t be construed as a recommendation or solicitation of any products offered by SoFi’s affiliates and subsidiaries. In addition, this information is by no means meant to provide investment or financial advice, nor is it intended to serve as the basis for any investment decision or recommendation to buy or sell any asset. Keep in mind that investing involves risk, and past performance of an asset never guarantees future results or returns. It’s important for investors to consider their specific financial needs, goals, and risk profile before making an investment decision.
No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this content.
Communication of SoFi Wealth LLC an SEC Registered Investment Advisor
SoFi isn’t recommending and is not affiliated with the brands or companies displayed. Brands displayed neither endorse or sponsor this article. Third party trademarks and service marks referenced are property of their respective owners.
SOSS23071802