Hoping to Make a Catch-Up Contribution? One Big Change for High-Income Earners

Welcome back, everyone.

Peter, good to see you. Some big changes coming to catch-up contributions, a lot to sort through today. The passage of the Secure Act 2.0 changed a lot when it comes to saving for retirement, of course, and we've just received some clarification from the IRS about catch-up contributions.

So let's just start at the tippy-top. What if I want to make a catch-up contribution in 2024? 50 or above and have already maxed out the standard contribution. So in 2024, that is going to go up to $23,000 for anyone. And then if you are 50 or above, you have an extra $7,500. So the amount of the catch-up contribution did not change. Someone over 50, a higher income earner really looking to supercharge retirement, do as much as possible, could theoretically save up to $30,500.

$30,500 of their own money. And then the total limit, including profit sharing, company match, safe harbor, is $69,000 could get into your 401k in 2024 if you take advantage of that catch-up contribution. But what the big news is here, Aaron, is that originally with the passage of the Secure Act, that catch-up contribution was going to be required to go into the Roth side of your 401k, which means a lot of companies actually had to adopt the Roth. There were still a lot of companies out there that did not have a Roth component to their 401k.

They had to go through all of the work to revise their plan documents and implement the Roth. So that's the news here is that what was going to be required to be on the Roth side, at least for 2024 in the foreseeable future, they have delayed the implementation of that required Roth catch-up contribution. Right.

Okay. So why do you think the government is making this change? Well, I think that the availability of the catch-up contribution and the upping of the amounts for the standard contribution is because retirement is more and more on our own shoulders. The government has acknowledged that and made mention of that more and more often here. They're trying to allow us as individuals to do more to fund retirement. But the thought process behind those catch-up contributions being on the Roth side is first and foremost, if you are able to make catch-up contributions, you're probably a higher income earner, meaning that you are in a progressively higher tax bracket.

And mandating that that goes on the Roth side means that it's taxable now, means that the government gets to collect the tax dollars from those contributions now rather than waiting till later with a traditional kind of tax deferred 401k or IRA contribution. Government does have a debt problem. They need the money.

I don't know if you've seen that 32 trillion. Right. So what is your advice then for high income earners who are over 50? Well, I think, A, do as much as you possibly can.

Right. In reality, retirement is more and more on our own shoulders, hopefully 50 and above, you're able to really supercharge those retirement accounts. Maybe the kids are off the payroll up and out of the house and you've got a little bit more discretionary income. But be very careful in actually sitting down and crunching the numbers. I think that there are a lot of people that sort of have defaulted to one line of thinking or another. Either I'm going to defer and delay paying taxes as much as possible on everything, or I've heard that Roth is the best, so I'm going to make my contributions with Roth on everything that I can, when in reality, it is a very case by case specific kind of consideration. Is your current income in one tax bracket and are your expectations for how much income you need to generate for yourself in retirement in a different tax bracket?

Will you be staying the same? Will you be in a lower bracket? Or we know in 2026, even more things are changing. Could you potentially be in a higher tax bracket in retirement? Because that's additional big news here is that a lot of people still don't know that the current tax brackets expire and the tax rates expire in 2026. And the 12 percent bracket becomes the 15, the 22 becomes the 25, the 24 becomes the 28. That is not a 3 percent tax increase. That's like a 25 percent tax increase on your lowest dollars there.

So are we going to be paying more in taxes in the future, the same or less in taxes? You really need to sit down and crunch your specific numbers, talk about your retirement expectations to know which way is going to be best for you. You mentioned that employers had a lot of catching up to do regarding those Roth accounts. Can I get my employer to match my contribution on the Roth side?

Yeah. And in fact, this is like one of the common misconceptions about Roth 401ks. A lot of people were under the impression that their company only matches if they defer paying taxes on their own dollars that they contribute and that the company wouldn't match if they put their money into the Roth. When in actuality, the company does not care and it's not a discretionary item on whether they match or not, the option to pay taxes up front or to defer them is on you. But as long as you're putting money in, if the company offers a match, they have to match. Now, the company is nice enough to offer that match, but they are not nice enough to pay your taxes on your behalf on those matched dollars. So here's where the thing is, is that if you choose to defer, their money goes in deferred as well. If you choose to make your Roth contributions, the company still puts their side of that contribution, the match, into the tax deferred side. So if you are making Roth contributions and the company is matching, you actually have two pools of money inside of your 401k. They'll track it, they'll make sure to keep tabs on it, but one side of it, your dollars, are Roth tax free for the future and their contributions are going to be tax deferred. But yes, the company is still going to match your Roth contributions if they offer a match at all. Interesting.

Okay. Now I want to talk through one more piece of advice you have for high income earners. This is really interesting and I want everybody to pay close attention because we're talking math here, Peter, not my strong suit. If you max out your 401k early in the year, these high income earners may miss out on some of the match and you've crunched those numbers.

Explain what we're looking at here, please. So let's say that I'm earning $200,000 and my spouse makes $100,000. So we can't Roth because we're income eliminated.

I don't even get a deduction if I make contributions to an IRA. So the 401k is really the best tool and I'm trying to, let's just say, save 15% of my gross income toward retirement. Well, we can do that, but I have a lot of clients that sort of front end load that savings, meaning that they're doing 15% of each paycheck. If I am earning 200,000, that is about $16,600 a month, and if I am contributing, let's call it 15% and the company is matching 5% per paycheck of my salary, then I end up maxing out my 401k sometime around September.

Well, that means that I may miss their match for October, November and December. That is potentially some of the free money that they offered. And I don't love the term free money, but that's what it's generally considered. You work the same whether you get it or not. And anyway, those three months, if I have maxed out the 401k early, I could potentially miss out on their match. Whereas if I lowered my contributions to, let's call it 11.25% per paycheck, now I have evened out my contributions, still maxing out the 401k, but doing so in every month, and therefore I get the match every month.

Now this is company by company specific. This is plan specific to your company's particular plan document. And so some companies actually will true you up at the end of the year and add any missed match. Some companies don't even match at all until the end of the year, but I have run up against this numerous times with higher income earning clients that max out their 401k early.

We take a look at it, we crunch the numbers, and it ends up that they are missing out on some of the match that would have been available for doing so. So my advice is really carefully check on this with your company, call the financial institution, call the plan sponsor, get a copy of the plan document, take a look at that. And if you need any help with that, feel free to contact me.

I've done this several times before. And I know the questions to ask to make sure that you are getting the most out of your company match since you are trying to take as much advantage of that company retirement plan as possible. Right. Well, and as you can see in your example, Peter, that's a difference of $2,500, right? Right.

Yeah. There's real money on the table here, Erin, and you want to capture it all, right? Is there a floor for that salary where it starts becoming an issue? Well, I think that if you're earning about $250,000, $300,000 combined household income, it's really an issue because you are income eliminated from being able to make Roth IRA contributions.

You don't get the deduction from standard IRA contributions. So now the 401k really is your best and quite frankly, only true retirement savings tool. So a lot of people in that kind of description are really trying to make the most of it as early as possible. If you are maxing out your 401k early in the year, I think this is a conversation that you need to pay special attention to.

Really interesting. Peter, I think you're getting a lot of phone calls. If somebody wants to reach you to find out anything that we've chatted about with catch up contributions and this 401k, what's the best way to reach you? Yeah, give me a call at Rashaan Planning, happy to help you crunch the numbers, better understand. And we actually do help people with the investments inside of their 401ks because people don't get a lot of guidance on that part either, Erin.

So give us a call 919-300-5886, 919-300-5886. The 401k is a great tool, but it's not truly a plan. You want to bring all of the tools together to map out the plan for your financial future.

So get a better understanding of where and when each tool is most appropriate and you can make the best use out of it. Give us a call 919-300-5886 or you can visit online richonplanning.com is what it looks like. It's my last name, Rashaan, RashaanPlanning.com or you can email me Peter at RashaanPlanning.com. All right, Peter, thank you. Yep, important topic, Erin. Thank you.

Hey everyone, Peter Rashaan here. Hope you enjoy the content. As always, make sure that you like, subscribe, share the videos with others that may find this information helpful. And as always, you're welcome to be in touch or to submit questions or comments. You can comment below the video anything that you'd like to see or hear shared on our YouTube channel and in future videos. If you've got a topic that you've been thinking about or is of concern for you financially, be sure to let us know. We'd love to help you by discussing it on the channel. So appreciate the continued views and the likes and the subscribes, the shares, the comments, always helpful. We look forward to getting you the information that you need. Thank you.