Beginning in January 2024, high-income taxpayers who wish to make catch-up contributions to traditional retirement accounts will be required to characterize those contributions as Roth contributions, rather than pre-tax contributions.  Of course, not all 401(k) and 403(b) sponsors currently offer a Roth contribution option in connection with their traditional plan.  If business owners wish to give their high-income employees the option of taking advantage of the new and expanded catch-up contribution rules, they must proactively amend their plans to include this Roth contribution option.  Employers who want to give high-income taxpayers the option should not wait until the last minute to take action—it's important for these clients to understand that if they wait until the last minute, it could be too late to offer a catch-up option for 2024.

New SECURE 2.0 Roth-ification rule

Under current law, individuals who have reached age 50 and older are permitted to make additional catch-up contributions to retirement accounts.  For company-sponsored retirement plans (including 401(k)s and 403(b) plans), the catch-up contribution limit is $7,500 in 2023.  The $7,500 catch-up contribution limit is indexed for inflation.

Under SECURE 2.0, starting in 2024, if the taxpayer has income of at least $145,000 for the year, the catch-up contribution must be treated as a Roth contribution.  That means these funds are contributed with after-tax dollars, so they will not reduce current taxable income, but can be withdrawn tax-free in the future.  The $145,000 income threshold will also be indexed for inflation in future years.