IRS delays change for 401(k) catch-up contributions. Here’s what higher earners need to know

Higher earners who maximize retirement savings now have more time for pretax catch-up 401(k) contributions, thanks to new IRS guidance. 

Currently, “catch-up contributions” allow savers 50 and older to funnel an extra $7,500 into 401(k) plans and other retirement plans beyond the $22,500 employee deferral limit for 2023.

A change enacted via Secure 2.0 would have eliminated the upfront tax break on catch-up contributions for higher earners by only allowing these deposits in after-tax Roth accounts, starting in 2024.

But the IRS on Friday announced a two-year delay for the change, meaning savers can still make pretax catch-up contributions through 2025, regardless of income.

“The administrative transition period will help taxpayers transition smoothly to the new Roth catch-up requirement,” the IRS said in a statement. 

The Secure 2.0 change applies to employees making catch-up deposits to 401(k), 403(b) or 457(b) plans who earned more than $145,000 from a single company the prior year. 

Some 16% of eligible employees took advantage of catch-up contributions in 2022, according to a recent Vanguard report based on roughly 1,700 retirement plans.

The delay is “a very good thing” for retirement plan administrators, said Dan Galli, a Norwell, Massachusetts-based certified financial planner and owner of Daniel J. Galli & Associates.

“There’s no way to do this right without a couple of years of preparation,” he added.

About 200 organizations wrote a letter to Congress in July asking for more time to implement the 401(k) changes, and many are applauding the delay.

Retirement plan sponsors are grateful for the agency’s “critically important relief,” Diann Howland, vice…