Major Updates to Pension Catch-up Contributions

Professionals aged 50 and above can take advantage of catch-up contribution provisions under salary deferral plans such as 401(k) Deferred Compensation plans, 403(b) TSA plans, 457(b) Government plans, and SIMPLE plans.

Age 50+ Catch-up Contributions: For retirement plans like 401(k), 403(b), and 457(b), the catch-up contribution limit for those age 50 and above remains $7,500 from 2023 through 2025, while SIMPLE plans allow $3,500. These thresholds are periodically adjusted for inflation.

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Introducing Age 60 through 63 Catch-ups: As of 2025, the SECURE 2.0 Act introduced new catch-up contribution rules for individuals aged 60 through 63. Recognizing increased income potential near retirement, these enhancements allow contributions up to $10,000 or 50% more than standard catch-up amounts, creating a maximum threshold of $11,250 for 2025. SIMPLE plans feature adjusted computations, peaking at $5,250 ($6,350 for employers with no more than 25 employees).

Mandatory Roth Contributions for High Earners: Beginning January 1, 2026, individuals earning over $145,000 in the previous year from their current employer must allocate catch-up contributions to Roth options.

  • Inflation Adjustments: The $145,000 threshold will be subject to inflation adjustments in upcoming years.

  • Roth Designation Flexibility: Employees under the income threshold can opt to designate catch-up contributions as Roth contributions.

  • Absence of a Roth Plan: Employees with earnings above the threshold at firms lacking Roth plans will be unable to execute catch-up contributions.

  • Considerations for New Employees: Employees with partial-year service in the previous year meet Roth catch-up requirements only if exceeding the established wage threshold.

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Key Tax Planning Strategies: This amendment offers strategic tax planning avenues. Roth account contributions allow retirees to mitigate risks from future tax changes by managing both pre-taxed and untaxed withdrawals. The Roth structure facilitates tax-exempt removal of principal and earnings if specific conditions, including the age of 59½ and the adherence to the five-year rule, are satisfied. Furthermore, Roth accounts are advantageous for estate planning, as they do not mandate distributions during the original owner’s lifetime.

  • Clarifying the Five-Year Rule: Withdrawals made before the completion of five consecutive years post-initial contribution are not viewed as qualified. Each retirement plan enforces separate holding periods. Thus, participating in multiple Roth 401(k) plans may result in differentiated holding timelines, corresponding to the initial contribution dates for each plan. Special rules govern Roth plan rollovers.

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Timing Strategies: Accurate timing in Roth contributions is pivotal. Younger, high-income employees should consider early Roth contributions to meet the five-year period before retirement, while those approaching retirement might explore alternate avenues.

For personalized advice or inquiries, please reach out to our office for assistance.

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