The latest revisions to laws governing retirement funding and accounts enacted by Congress as part of the SECURE Act 2.0 overhaul continue to enter into force over time.
The inflation-adjusted ceiling on contributions to Section 401(k), 403(b), and government plans under 457 will increase to $23,500.
Older workers – those age 50 or older – have been able to set aside more funds as “catch-up” contributions to both IRA and 401(k) accounts (or related plans in the non-profit world) for many years. The capped amounts for 2025 are an extra $ 7,500, which remains unchanged. Also, the “catch-up” amount remains at $ 1,000 for IRA contributions. As was the case for 2024, in 2025, for those who chose to participate in this funding arrangement through their employer’s plan AND who made more than $ 145,000 for 2024, such “catch up” contributions may only be made as ROTH 401(k) contributions (provided their employer has or amends their plan to allow for such contributions). This will increase the cost of funding for retirement by these participants since ROTH amounts are taxed when contributed, rather than when distributed at retirement.
The deduction for IRA “catch-up” contributions remains unchanged – they will still be deductible, to the extent permitted under existing provisions.
Of course, the extra up-front tax is offset by the tax-free accumulation and tax-free income distributions when these amounts and the related earnings are paid out.
Commentators have challenged the trope that retirees will be in lower tax brackets during retirement than what they are currently subject to during their working (and retirement plan funding) career. These higher-paid workers, in taking advantage of the extra funding opportunities at the later stages of their working life, have often amassed balances in their accounts to the point that they have fully replaced their wages (and often more). Should this be the case for you, a ROTH account would actually put you in a better tax position in retirement. This is due to the fact that you need never take a payout from a ROTH account balance or, if you do, it will be income tax-free (avoiding being pushed into a higher tax bracket for your taxable payouts). Additionally, as part of your estate, any taxable retirement balances will be subject to estate tax when you die and will cost the heirs you leave it to income taxes on the distribution, whereas the ROTH will be taxed as part of your estate but will be paid out income tax-free to the named heirs.
Should you have questions about this change (and, viewed in another light, opportunity), please call our office to set up an appointment to discuss it further.
Mark H. Misselbeck, CPA, MST, is a Tax Principal at Katz, Nannis + Solomon, P.C. If you have any questions or would like to speak with one of our tax professionals, please contact our office at 781-453-8700.