Strategic Tax Wealth

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.

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