New 401k Rules you should know!
New 401k Rules you should know!
So in the 'what we expected' category we have: new year - new limits:
New Limit: $24,500 for individuals under age 50 (up from $23,500). - Employee
Catch-Up (Ages 50–59 & 64+): $8,000 (up from $7,500), for a total employee deferral of $32,500.
Super Catch-Up (Ages 60–63): $11,250, for a total employee deferral of $35,750 (unchanged).
Combined Limit (Employee + Employer): $72,000 total across accounts, not including eligible catch-up contributions.
Now for the new news …
This is for my high earners- those of you earning more than $140k -
Any catch-up contributions you make must be Roth contributions using after-tax dollars. Yup, so you no longer have the option to do it pre-tax. Your plan MUST support this. This might change how you are thinking about doing those catch-ups so good to start thinking about it now!
In a way though, I’m not mad. Even though it’s nice to be able to reduce the taxable income- my high earners are always turning themselves into pretzels pulling off backdoor Roth conversions - so this will help them get more money into Roths for those that are so inclined.
Wait Liz, WTF is a Roth IRA?
For those of you who are not sure what I’m on about, let me take a moment to explain what a Roth IRA is and why you should care about it.
A Roth IRA is a special personal savings account for retirement. You fund it with money you have already paid taxes on. Your investments grow and you can take money out tax-free in retirement.
Pros
Tax-free money: You pay no taxes when you withdraw money in retirement.
No forced withdrawals: You do not have to take out money at a certain age.
Take out your deposits: You can pull out your original contribution money anytime without penalties.
Tax-free growth: Your investments grow without taxes eating into the gains.
Cons
No immediate tax break: No tax deduction in the year you put money in. :(
Income limits: High earners can’t contribute directly.
Rules on earnings: You must wait until age 59½ and have the account for five years to withdraw gains tax-free.
Low limits: Annual contribution caps are relatively small.
Liz & The Team