The SECURE 2.0 Act, passed in late 2022, introduces changes to retirement savings options, particularly affecting higher earners using traditional 401(k) plans.
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Starting from 2026, "catch-up" contributions by older, higher earners will be designated as after-tax Roth contributions, rather than regular 401(k) ones.
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Traditional 401(k) and Roth IRA accounts offer different tax advantages and considerations for retirement savings.
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Nearly 70% of private-sector American workers had access to employer-sponsored retirement plans as of March 2022, but only 52% took advantage of them.
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401(k) accounts are a popular retirement vehicle due to their set-it-and-forget-it approach and pre-tax contributions, which lower taxable income.
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Roth accounts, on the other hand, involve contributions taken directly from net pay, with tax advantages realized at age 59.5 when withdrawals become tax-free.
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In 2023, workers aged 50 and older can make additional contributions of up to $7,500 to their 401(k) accounts.
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Starting in 2026, high-income earners over 50 making more than $145,000 cannot make catch-up contributions to regular 401(k)s; instead, these contributions must go to Roth accounts, with significant tax implications.
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The shift to Roth accounts reduces upfront tax benefits for high earners and affects take-home pay, as paychecks decrease by the exact amount contributed to the Roth.
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Retirees may find the Roth's tax-free growth advantageous if they anticipate being in the same or higher tax bracket in retirement, especially if they have large 401(k) and traditional IRA balances.
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