The Department of the Treasury and the IRS recently issued final regulations addressing the Secure ACT 2.0 provision that changes the rules for 401k catch-up contributions that apply to those age 50 and older.
The proposed IRS regulations require the catch-up contributions to 401k type plans be funded in the ROTH (post-tax) account rather than the pre-tax account for individuals who had wages above a certain limit. While this change may allow savers to benefit from the tax-free growth of a Roth IRA on qualified distributions in the future, it limits the allowed tax deduction from the traditional option and therefore increases taxable income.
The final regulations made some modifications to the proposed changes, but the main takeaway is that the final regulations will not be applied until the 2027 tax year (after calendar year-end on December 31, 2026) which will give individuals some extra time to benefit from pre-tax salary deferrals.
In addition, it gives employers extra time to make sure their 401k plan offers a Roth saving option. Once this new rule is implemented, 401k plans that do not have a Roth option will not be allowed to accept Age 50 and over catch-up contributions from high-income employees.