To encourage people to save for retirement, the IRS allows people age 50 and over to put an extra $7,500 into their 401(k) plans before hitting pre-tax limits (and an extra $11,250 for people between 60-63). But upcoming changes to the tax code will make that perk vanish for people who make more than $145,000 per year.
Starting next month, high-earners over 50 who are hoping to put more money into their retirement savings will have to do so after paying taxes via a Roth 401(k). That’s going to mean they’re paying higher tax rates than they would when they take retirement disbursements, when their income is typically lower, putting them in a lower tax bracket.
The move also presents a pair of other new threats for people over 50. Because the money will be included in their taxed income instead of going directly into a 401(k), it could push some people into a higher tax bracket today.
And some high earners won’t be able to participate, given current income limits on Roth IRAs. (People who make above $150,000 as a single filer or $236,000 as a couple are ineligible to contribute to the savings vehicle.)
While some 401(k) plans don’t currently offer a Roth option, financial service firms have been scrambling to add them in recent years and more are likely to after the new rules prevent some people from utilizing the pre-tax catch-up option.
While the new rules could mean short-term pain for some people looking to boost their savings, they could have longer-term advantages. Should the market continue to hit new highs in the coming years, gains on Roth investments will not be taxed, reducing the burden in the golden years.
