The Inner Income Service has provided a two-year delay for the Setting Each Group Up for Retirement Enhancement (Safe) 2.0 Act’s mandate that each one catch-up contributions for sure high-income taxpayers be handled as Roth contributions.

Nonetheless, many plan sponsors and members have been questioning in regards to the particulars that may decide how the rule is carried out in apply. 

In the identical steering that delayed the formal efficient date of the Roth catch-up mandate, the IRS answered some urgent questions — and acknowledged that further questions stay to be answered in forthcoming steering. 

Safe 2.0 & Catch-Up Contributions: The Fundamentals

For company-sponsored retirement plans, together with 401(okay)s and 403(b) plans, the catch-up contribution restrict is $7,500 in 2023. Beginning in 2025, a separate catch-up contribution is permitted for taxpayers who’re between ages 60 and 63. That contribution restrict will probably be equal to the higher of (1) $10,000 or (2) 150% of the usual catch-up contribution restrict for 2024. The $10,000 restrict can even be listed for inflation. As soon as the taxpayer turns 64, the usual catch-up contribution restrict applies.

Beginning in 2026, after the two-year IRS delay, if a taxpayer has revenue of no less than $145,000 for the prior yr, the catch-up contribution for the next yr should be handled as a Roth contribution. Meaning these funds are contributed with after-tax {dollars}, so they won’t scale back present taxable revenue however could be withdrawn tax-free sooner or later. The $145,000 quantity can even be listed for inflation.

The $145,000 threshold is new and isn’t tied to present definitions of extremely compensated workers. That quantity can be tied to W-2 revenue, so if an S company proprietor takes $130,000 in compensation but in addition receives further income from the company, the proprietor won’t have crossed the $145,000 threshold to set off the Roth contribution rule.