Big Changes for Pension Catch-up Contributions

Pension Catch-Up Contributions rules are evolving. If you want to understand the changes and how to prepare for tax season continue reading this article.

Individuals age 50 and over can make additional annual “catch-up” contributions to salary reduction plans including 401(k) Deferred Compensation plans, 403(b) TSA plans, 457(b) Government plans and SIMPLE plans.

Age 50+ Catch-ups

For 401(k), 403(b) and 457(b) plans, the age 50 and over catch-up contributions, for plans that offer them, has been $7,500 for years 2023 through 2025 and for SIMPLE plans $3,500. These amounts are periodically adjusted for inflation.

Age 60 through 63 Catch-ups

New for 2025, the SECURE 2.0 ACT allows an extra catch-up contribution for taxpayers ages 60–63. The idea is to help people nearing retirement save more while they can.

The SECURE 2.0 Act raises catch-up limits for ages 60–63. For 2025, the maximum catch-up is $11,250. SIMPLE plans are different, with a 2025 maximum of $5,250, or $6,350 for employers with 25 or fewer employees.

Mandatory Roth Contribution for Higher Incomes

Effective January 1, 2026, for employees with wages of more than $145,000 in the prior year from the employer sponsoring the plan, catch-up contributions must be designated as Roth contributions.

• Inflation-Adjusted The $145,000 will be inflation-adjusted in future years.
  
• Employees Under the Threshold
  Other employees who are eligible to make catch-up contributions may designate their catch-up contributions as a Roth contribution.
  
• Employer Doesn’t Have a Designated Roth Plan
  If the employer doesn’t have a designated Roth plan, then catch-up contributions cannot be made by employees whose wages exceed the Roth catch-up wage threshold.
  
• No Prior Year Employment History
  An employee who worked for the employer sponsoring the plan for only part of the preceding calendar year would be subject to the Roth catch-up requirement in the current year only if the employee had wages exceeding the full Roth catch-up wage threshold from the employer for the preceding calendar year.

Key Tax Planning Opportunities

Taxpayers can leverage these changes in pension catch-up contributions as a strategic way to broaden their tax planning approaches. By contributing to Roth accounts, retirees have the advantage of reducing the risks linked to fluctuating future tax rates. As they can then access funds from both taxed and untaxed accounts. Roth accounts provide the benefit of tax-exempt withdrawals of both the initial contributions and the investment gains. This is provided specific conditions, such as the employee being age 59½ and the five-year rule, are met. Because of these conditions, Roth plans can a powerful instrument for estate planning. (As Roth Plans do not require distributions during the original owner’s lifetime.)

Explanation of the Five-Year Rule

A distribution will not be a qualified distribution if the distribution is made between the time of the first contribution to the plan and before five consecutive taxable years have been completed. Generally, the holding period is determined separately for each plan in which the employee participates. So, if an employee has elective deferrals made to Roth 401(k)s under two or more plans, the employee may have two or more different holding periods, depending on when the employee first had made contributions to a Roth 401(k) under each plan. Special rules apply when there have been rollovers of Roth plans. Check with this office for additional details.

Timing Considerations

Taxpayers should plan the timing of their Roth contributions wisely. Younger high-income employees could benefit from starting Roth contributions now. This way, they can meet the five-year holding period before retirement. Those nearing retirement might need alternative strategies.

Questions About Pension Catch-Up Contributions?

If have questions or need assistance, please contact this office.