Millions of high-earning Americans to lose popular 401(K) tax deduction - here’s what it means for Y

[mystery-ak]

Millions of high-earning Americans to lose popular 401(K) tax deduction - here’s what it means for YOU

    Workers aged over 50 making catch-up contributions to their 401(K)s will only be able to funnel them into a Roth account from next year
    It means they will be taxed upfront - rather than when they withdraw the money
   

By Helena Kelly Consumer Reporter For Dailymail.Com

Published: 11:49 EDT, 17 July 2023 | Updated: 16:08 EDT, 17 July 2023

Changes to a popular 401(K) tax deduction are set to hit millions of high-earning Americans from next year.

Workers over the aged of 50 are entitled to make catch-up contributions to their 401(K)s worth up to $7,500 this year. The annual cap on all contributions is $30,000.

But from 2024, those earning over $145,000 will no longer be able to put these catch-up payments into a traditional 401(K).

Instead, the money will be only funneled into a Roth IRA account, according to new rules passed through Congress in December.

The main difference between a Roth account and a 401(K) pot is that the former is taxed upfront - but can be withdrawn for free in retirement.

more
https://www.dailymail.co.uk/news/article-12307209/Millions-high-earning-Americans-lose-popular-401-K-tax-deduction-heres-means-YOU.html

[Hoodat]

The main difference between a Roth account and a 401(K) pot is that the former is taxed upfront - but can be withdrawn for free in retirement.

For now, anyway.

[libertybele]

Millions of high-earning Americans to lose popular 401(K) tax deduction - here’s what it means for YOU

    Workers aged over 50 making catch-up contributions to their 401(K)s will only be able to funnel them into a Roth account from next year
    It means they will be taxed upfront - rather than when they withdraw the money
   

By Helena Kelly Consumer Reporter For Dailymail.Com

Published: 11:49 EDT, 17 July 2023 | Updated: 16:08 EDT, 17 July 2023

Changes to a popular 401(K) tax deduction are set to hit millions of high-earning Americans from next year.

Workers over the aged of 50 are entitled to make catch-up contributions to their 401(K)s worth up to $7,500 this year. The annual cap on all contributions is $30,000.

But from 2024, those earning over $145,000 will no longer be able to put these catch-up payments into a traditional 401(K).

Instead, the money will be only funneled into a Roth IRA account, according to new rules passed through Congress in December.

The main difference between a Roth account and a 401(K) pot is that the former is taxed upfront - but can be withdrawn for free in retirement.

more
https://www.dailymail.co.uk/news/article-12307209/Millions-high-earning-Americans-lose-popular-401-K-tax-deduction-heres-means-YOU.html

A Roth IRA isn't a bad thing unless they change the rules again and find a way to tax Roth IRA's.  The obvious is to talk to a tax advisor or financial advisor as to how to minimize your taxes once you retire.  Unfortunately, the tax rules continue to change.

[Hoodat]

A Roth IRA isn't a bad thing unless they change the rules again and find a way to tax Roth IRA's.  The obvious is to talk to a tax advisor or financial advisor as to how to minimize your taxes once you retire.  Unfortunately, the tax rules continue to change.

The current regime prefers you pay taxes now while they are in power rather than deferring them 'til later when a Republican may be in office.

[Kamaji]

A Roth 401(k) is often actually a bigger boon to wealthier income-earners than a normal 401(k) for the simple reason that all distributions after retirement come out tax-free, unlike in a regular 401(k), where all distributions after retirement are taxed at ordinary income tax rates.

[Hoodat]

A Roth 401(k) is often actually a bigger boon to wealthier income-earners than a normal 401(k) .  .  .

I disagree.  People with higher incomes are in higher tax brackets.  So deferring taxes now and paying them when they withdraw funds at a much lower tax rate makes better sense.

There are people who have not been paying into retirement accounts for most of their working careers and who now find themselves in a great paying job.  It is these people who are now trying to play catch-up by putting in extra money.  It is these people who are now being screwed.  Women especially who took breaks from their professional careers to raise children and who are now returning to the labor market to make up for years of neglecting their retirement planning.

[Kamaji]

I disagree.  People with higher incomes are in higher tax brackets.  So deferring taxes now and paying them when they withdraw funds at a much lower tax rate makes better sense.

There are people who have not been paying into retirement accounts for most of their working careers and who now find themselves in a great paying job.  It is these people who are now trying to play catch-up by putting in extra money.  It is these people who are now being screwed.  Women especially who took breaks from their professional careers to raise children and who are now returning to the labor market to make up for years of neglecting their retirement planning.

Except that in a Roth, all distributions, including earnings on the contributed amounts, not just the original contributions, are tax-free.

[Hoodat]

Except that in a Roth, all distributions, including earnings on the contributed amounts, not just the original contributions, are tax-free.

Yes, I get that.  What difference will that make when you take a $20,000 distribution at age 70?  This is catch-up money.

[Kamaji]

Yes, I get that.  What difference will that make when you take a $20,000 distribution at age 70?  This is catch-up money.

Depends on what your marginal tax rate is during retirement.  If you're in the top brackets already, then all distributions from an IRA or 401(k) will be taxed at the high bracket rate, including both contributions and earnings on the contributions; on the other hand, if you put into a Roth 401(k), only the contributions would have been taxed at the high bracket rate; the earnings won't be taxed at all.

[andy58-in-nh]

Except that in a Roth, all distributions, including earnings on the contributed amounts, not just the original contributions, are tax-free.

The challenge with a Roth (for older folks) is that the money needs to be in the account for at least 5 years from the date of the first contribution, in addition to the owner being over 59.5 years old, before any earnings can be withdrawn, tax-free. 

Also, for a Roth IRA, there is a cap on adjusted gross income that can reduce or eliminate one's ability to contribute.   Roth 401ks do not have such a limit, and if you are still working and have a company-sponsored retirement plan that supports Roth contributions, that may be an option.

But overall, you may be better off with the traditional pretax contributions because you get a benefit now (deducted from earned income) and may be more likely to have a lower marginal tax rate when (and where) you choose to retire. 

[Kamaji]

The challenge with a Roth (for older folks) is that the money needs to be in the account for at least 5 years from the date of the first contribution, in addition to the owner being over 59.5 years old, before any earnings can be withdrawn, tax-free. 

Also, for a Roth IRA, there is a cap on adjusted gross income that can reduce or eliminate one's ability to contribute.   Roth 401ks do not have such a limit, and if you are still working and have a company-sponsored retirement plan that supports Roth contributions, that may be an option.

But overall, you may be better off with the traditional pretax contributions because you get a benefit now (deducted from earned income) and may be more likely to have a lower marginal tax rate when (and where) you choose to retire. 

For most people, I quite agree that a regular IRA or 401(k) is preferable, precisely because it effectively moves income from a higher bracket now to a lower bracket during retirement.

[Hoodat]

Depends on what your marginal tax rate is during retirement.  If you're in the top brackets already, then all distributions from an IRA or 401(k) will be taxed at the high bracket rate, including both contributions and earnings on the contributions; on the other hand, if you put into a Roth 401(k), only the contributions would have been taxed at the high bracket rate; the earnings won't be taxed at all.

Someone playing catch-up typically won't have a high marginal tax rate during retirement since they are already way behind in saving for retirement.  Hence the need to 'catch up'..

The catch-up rules were written specifically to help people like this (primarily women returning to the workforce after raising families).  These are the people whom this regime will be screwing over.

[Kamaji]

All of which is why it's usually best to do a basic financial model using excel to model out, using reasonable assumptions, which is likely to give you the better result.