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Changes Coming for Some Employees’ 401k or 403b Plan Contributions

By April 19, 2023No Comments

Employees covered by 401k or 403b Plans often reevaluate how much they are having deducted from pay for contribution to the Plan, after filing their Federal and State Tax Returns.  The recent SECURE 2.0 law changes include significant new rules impacting employee contributions.  Employees, employers, investment advisors, and tax advisors should be thinking about what effect these new rules will have on contribution decisions, payroll processing, and retirement planning.

First, beginning with the 2024 Tax Year, employee catch-up contributions under 401k and 403b Plans – the “extra” amount of employee contributions available to those at least age 50 – must be made as ROTH (after-tax, not tax-deductible) contributions rather than pre-tax contributions, for certain “highly paid” employees.  The “highly paid” are those whose prior year wages were at least $145,000 (indexed for inflation).

Second, catch-up contributions will have a larger dollar amount for individuals who are age 60 to 63.  Currently, all who are at least age 50 have a catch-up contribution limit of $7,500 (which is indexed for inflation).  Beginning in 2025, those 60 to 63 years old will have a “modified” catch-up amount that is the greater of (i) $10,000 or (ii) 150% of the standard catch-up amount for 2024*, indexed for inflation.  (* The base year may be changed to 2025.)

Finally, ROTH accounts in 401k and 403b Plans are exempt from the age 73 (previously age 70-1/2 or age 72) “minimum required distributions” (MRDs or RMDs).  In other words, the part of the employee’s 401k or 403b Plan account which is ROTH money, will not be subject to mandatory distributions because of age.  This is effective beginning with the 2024 required distribution year.

ACSI is available to answer questions about the impact of these changes on Plans for which we provide TPA services.

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