Tax breaks for catch-up contributions for some clients’ 401(k)s and other retirement plans are changing, requiring alterations in clients' retirement planning, advisors saay.

Starting in 2024, if your client earns more than $145,000 in the prior calendar year, all catch-up contributions to a 401(k) will, for clients 50 or older, have to be made on a Roth basis in after-tax dollars. IRAs’ current $1,000 catch-up contribution limit for people 50 and older will be indexed to inflation starting next year.

Starting in 2025, clients age 60 through 63 will be able to make catch-up contributions up to $10,000 annually to a workplace plan, indexed to inflation.

“At this stage, most clients aren’t proactively bringing this up,” said John McCafferty, director of financial planning at Edelman Financial Engines in Alexandria, Va. “When the topic does come up, I use it to communicate the importance of saving early.

“While the IRS/government is offering the opportunity to save more, at the same time they’re communicating they’ll take their share too from those of certain income levels,” McCafferty said.

Briana Smith, a wealth management financial advisor at CAPTRUST in Raleigh, N.C., warned about “nuances” in the catch-up amounts, which along with the other changes are part of the SECURE 2.0 Act.

“The catch-up for those turning 60 to 63 in calendar years 2025 on will be the higher of $10,000 growing with inflation or 150% of the current catch-up limit,” she said. “Also, SIMPLE [Savings Incentive Match Plan for Employees] IRAs have a similar catch-up increase for the same age range at the greater of $5,000 or 105% of current catch-up (indexed for inflation). The $145,000 is specific to wages earned, so those that are self-employed do not need to defer their catch-up on a Roth basis.”

“The rules for 401(k)s are notoriously complicated and, with the recent changes, there are even more nuances,” said Andrew Meadows, senior vice president at Ubiquity Retirement + Savings in San Francisco, a financial technology company that works with what it describes as the “historically underserved” small-business market. “The truth is, these rules are now allowing for more opportunities to save, especially for those who couldn’t when they were younger.”

“I don’t believe clients realize how this will impact their retirement savings on a yearly basis,” said Jeff Mattonelli, financial advisor at Van Leeuwen & Company in Princeton, N.J. “Currently, the $7,500 [401(k)] catch-up contribution is providing them with a tax deduction, which in 2024 won’t be the case.

“The benefit of these changes is that the catch-up contributions will now grow tax-free and be withdrawn tax-free in retirement,” he said. “For clients who will be 60 [to] 63 in 2025, these increased catch-up contributions provide another great benefit to bolster their savings.”

Advisors should initiate the conversations about the changes, said Taylor Hammons, head of Retirement Plans at Kestra Financial. “We’re also hearing from clients that they want to start planning now to give themselves enough time to incorporate increased limits into their long-term retirement savings approach,” he said.

“If they’ve grown accustomed to making the catch-up on a pre-tax basis and enjoying the benefits of the deduction from the current year’s income, they’re going to lose that, potentially having a higher tax liability in the years in which those contributions are made,” said Nathan Boxx, director of retirement plan services at Fort Pitt Capital Group.

“Confirm that your 401(k) plan allows for Roth contributions,” Boxx said. “If it doesn’t, there’s your answer. That’ll then prompt conversations about amending the plan to allow for such contributions.”

This will be a big topic with clients in the months ahead, advisors said. “SECURE 2.0 had over 90 provisions. We address the ones that are set to be effective in the next one or two years first,” Smith said. “The legislation was over 4,000 pages long, so there will always be more questions.”

“Plan sponsors who wish to give their high-income employees the option of taking advantage of the new Roth catch-up rules must amend their plans,” Hammons said.