High-income retirement savers may have to pay tax now on catch-up contributions. Eventually.

Pay taxes now or later is often a consideration when people decide how to save for retirement, but Congress decided the only option for some older Americans should be later for certain retirement accounts. 

Secure Act 2.0, passed last December, says any employee at least 50 years old whose wages exceeded $145,000 the prior calendar year and elects to make a so-called catch-up, or additional, contribution to their 401(k) must do so on a Roth basis, or with after-tax money. That means those employees wouldn’t be able to take a tax deduction for that contribution, which is up to an extra $7,500 for 2023. Instead, they’ll be able to withdraw tax-free during retirement. 

However, the change, set to start in 2024, is running into a myriad of problems that could prevent it from happening on time. Issues range from legislative errors, to operational challenges, to questions about whether the government can tell workers how to save for retirement -- obstacles that might make it impossible for the law to take effect at all.  

“There’s no way this will happen in 2024,” said Ed Slott, a retirement adviser. “The biggest financial institutions take a long time to build infrastructure to incorporate laws, and here, they don’t even know what the rules are.” 

Who is affected by the catch-up contribution change? 

Only people who earned $145,000 or more in wages in the prior year at their company will be able to fully deduct their contributions to a 401(k) account up to a standard annual limit but can’t deduct income used for catch-up contributions. Instead, they must pay taxes on that money and then contribute it to a Roth account, which returns growth untaxed. 

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Contribution limits will not change since individuals will still contribute this money to an employer-sponsored plan. For 2023, people 50 and older are allowed to put an extra $7,500 into their accounts, for a total of $30,000. 

Some 16% of eligible employees took advantage of catch-up contributions in 2022, according to a recent Vanguard report based on roughly 1,700 retirement plans.   

As the law is written now, self-employed people who don’t earn a wage may still be able to save their catch-up contribution in whatever account they choose, regardless of their earned income. 

What are the problems with the law? 

There are three main issues: 

1. In the haste to pass the legislation, the Act accidentally had a paragraph deleted increasing the general pre-tax deferral limit by the amount of any catch-up contribution. Without that paragraph, Congress technically made any catch-up contributions illegal. Congress sent a letter to Treasury at the end of May saying that was not its intent, and it will fix that mistake but hasn’t yet.

1. Since details aren’t clear on how the law would work, the American Retirement Association (ARA) and more than 200 employers, 401(k) record-keepers, and payroll providers have asked Congress for a two-year delay. For example, plans need guidance from regulators on questions including whether they must seek permission from high earners to put their catch-up contributions into a Roth or can do so automatically. Some state and local plans also must have their legislatures and unions approve a Roth 401(k) plan, while other plans don’t currently offer a Roth option. 

"Obviously, any new rule requires new administrative work to implement," the letter said. "But we have been struck by the overwhelming input from the retirement community that this particular task simply cannot be done in time by a vast number of plans."

3. Some people may feel outraged that the government is deciding how they can save for retirement. The Roth catch-up contribution means many workers will pay taxes on their catch-up money now, during their high-earning years, instead of in retirement, when those workers may find themselves in a lower tax bracket, some say. 

“That’s all psychology,” Slott said. “If the government didn’t force you, people would do it. Once the government says you have to do something, there’s a political uprise.”  

In the end, Slott said Roth accounts benefit higher earners because they don’t have to pay taxes on withdrawals and there won’t be any pressure to withdraw your money. In 2024, Secure Act 2.0 removes required minimum distributions from a Roth 401(K) before the account holder dies, unlike traditional retirement accounts. 

What happens if Congress doesn’t act in time? 

Millions of Americans may lose a chance to make a catch-up contribution next year. 

“For many of these plans, unless this requirement is delayed…their only means of compliance will be to eliminate all catch-up contributions for 2024,” the ARA letter to Congress warned. 

“That would be very bad,” said JB Beckett, founder of Beckett Financial Group. Not only would people lose the chance to save more for retirement, but the potential growth of that money, he said. 

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Is there anything that can be done? 

Yes. If Congress fails to act, the IRS and U.S. Treasury can provide relief, ARA said. 

“For example, the issue could be addressed simply by an announcement that the IRS will not seek taxes, interest, penalties or any other sanctions from any party by reason of noncompliance with the new Roth catch-up contribution rule prior to January 1, 2026,” ARA’s letter said. “There are many precedents for such action.” 

For example, the IRS has repeatedly waived penalties until it can straighten out confusing required minimum distribution (RMD) rules for certain beneficiaries of specific inherited retirement accounts and how long they have until the accounts need to be emptied. Penalties have been waived in 2020, 2021, 2022 and 2023. 

Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her atmjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday.