Big Changes for Pension Catch-up Contributions
Individuals age 50 and over can make additional annual “catch-up” contributions to salary reduction plans including401(k) Deferred Compensation plans, 403(b) TSA plans, 457(b) Government plans and SIMPLE plans.
Age 50+ Catch-ups: For 401(k), 403(b) and 457(b) plans, the age 50 and over catch-up contributions, for plans that offer them, has been $7,500 for years 2023 through 2025 and for SIMPLE plans $3,500. These amounts are periodically adjusted for inflation.
Age 60 through 63 Catch-ups: New for 2025, the SECURE 2.0 ACT introduced an additional catch-up contribution for taxpayers aged 60 through 63. The thought being those are the ages nearing retirement when individuals have more available income that they can contribute to their retirement nest egg.
The SECURE 2.0 Act increases the catch-up contribution limits to the greater of $10,000 or 50% more than the regular catch-up amount,which results in a maximum catch-up for 2025 of $11,250 for those aged 60 through 63. For SIMPLE plans, the computation is somewhat different and the maximum catch-up for 2025 is $5,250 ($6,350 if there are no more than 25 employees).
Mandatory Roth Contribution for Higher Incomes: Effective January 1, 2026, for employees with wages of more than $145,000 in the prior year from the employer sponsoring the plan, catch-up contributions must be designated as Roth contributions.
Inflation-Adjusted: The $145,000 will be inflation-adjusted in future years.
Employees Under the Threshold: Other employees who are eligible to make catch-up contributions may designate their catch-up contributions as a Roth contribution.
Employer Doesn’t Have a Designated Roth Plan: If the employer doesn’t have a designated Roth plan, then catch-up contributions cannot be made by employees whose wages exceed the Roth catch-up wage threshold.
No Prior Year Employment History: An employee who worked for the employer sponsoring the plan for only part of the preceding calendar year would be subject to the Roth catch-up requirement in the current year only if the employee had wages exceeding the full Roth catch-up wage threshold from the employer for the preceding calendar year.
Key Tax Planning Opportunities: Taxpayers can leverage this amendment as a strategic way to broaden their tax planning approaches. By contributing to Roth accounts, retirees have the advantage of reducing the risks linked to fluctuating future tax rates, as they can access funds from both taxed and untaxed accounts. Roth accounts provide the benefit of tax-exempt withdrawals of both the initial contributions and the investment gains, provided specific conditions, such as the employee being age 59½ and the five-year rule, are met. This capability enhances the appeal of Roth plans as a powerful instrument for estate planning, as they do not require distributions during the original owner’s lifetime.
Explanation of the Five-Year Rule - A distribution will not be a qualified distribution if the distribution is made between the time of the first contribution to the plan and before five consecutive taxable years have been completed. Generally, the holding period is determined separately for each plan in which the employee participates. So, if an employee has elective deferrals made to Roth 401(k)s under two or more plans, the employee may have two or more different holding periods, depending on when the employee first had made contributions to a Roth 401(k) under each plan. Special rules apply when there have been rollovers of Roth plans. Check with this office for additional details.
Timing Considerations: Taxpayers should plan the timing of their Roth contributions wisely. Younger high-income employees could benefit from starting Roth contributions now to meet the five-year holding period before retirement, whereas those nearing retirement might need alternative strategies.
If have questions or need assistance, please contact this office.
More About Us
Get to Know Prestige Accounting Services Group
Offices in Flemington, NJ, and Califon, NJ
Our Mission: At Prestige Accounting Services Group, we are on a mission to redefine the tax experience for individuals and small businesses. With a focus on personalized service, strategic planning, and expert guidance, we aim to empower our clients to succeed financially with confidence and ease.
Expertise in Action: With a wealth of experience and a team of dedicated professionals, we specialize in individual and small business tax preparation. While we excel in all areas of taxation, our passion lies in serving the unique needs of small business owners in New Jersey. We understand that small business taxation requires specialized knowledge and attention to detail, which is why we go above and beyond to ensure our clients receive the guidance and support they deserve.
Tailored Solutions for Every Client: Whether you're a high-net-worth individual seeking comprehensive tax planning or a small business owner in need of accounting and bookkeeping assistance, we have the expertise to meet your needs. Our team takes the time to understand your specific situation and develop customized solutions that align with your goals and objectives.
Why Choose Us?: What sets us apart from other New Jersey tax firms is our commitment to excellence and innovation in the field of taxation. We don't just prepare tax returns; we provide strategic insights, proactive planning, and actionable advice to help our clients achieve their financial goals. With a team of two CPAs, an EA, and an ERO, we have the expertise and resources to deliver exceptional service and results.
Your Success is Our Priority: At Prestige Accounting Services Group, we measure our success by the success of our clients. We are dedicated to building long-lasting relationships, providing unparalleled service, and helping our clients thrive in today's ever-changing tax landscape.
We can't wait for you to experience the Prestige Accounting Services Group difference.
Tax & Small Business Updates
Get the latest in tax and small business updates and issues that affect your finances and growth prospects.