Tom Ozimek

Catch-up contributions refer to a provision in 401(k) plans that allows individuals aged 50 and older to contribute extra money to their retirement savings accounts. The aim of catch-up contributions is to enable older workers to accelerate their retirement savings in the years leading up to their retirement.

This year, eligible workers aged 50 and older can put an extra $7,500 into their 401(k) accounts, for a total of $30,000.

But starting next year, changes will limit that eligibility for higher earners.

Changes to Catch-Up Contributions

The SECURE 2.0 Act, which cleared Congress late last year and was signed into law by President Joe Biden, changed the rules.

Specifically, people who earned more than $145,000 the previous year will no longer be able to make catch-up contributions to their 401(k) accounts. Instead, they'll only be able to funnel those funds into after-tax Roth IRA accounts.

The significance of this change is that those higher-earning Americans will end up having to pay taxes on their catch-up contributions up front, in years when they're typically in a higher tax bracket than when they have retired.

Traditional 401(k) accounts are funded with pretax earnings, and withdrawals are taxed once savers enter retirement. Roth IRA accounts, by contrast, are funded by after-tax dollars, with subsequent withdrawals being tax-free.