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

UK Daily Mail ^ | 07/17/2023 | Helena Kelly

[DFG]

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The main difference between a Roth account and a 401(K) pot is that the former is taxed upfront - but can be withdrawn for free in retirement.

With a 401(K), workers are not taxed on their contributions until they withdraw it.

This option is often preferable because retirees tend to be in a lower tax band in retirement meaning they pay a smaller levy - though this varies depending on incomes.

For example, if a worker was in a 35 percent tax bracket, they would be taxed $2,625 on a $7,500 catch-up payment.

But if they fell into a 22 percent bracket in retirement, the levy would also drop to $1,650.

Experts say the change will have a major impact on America's retirement planning. Figures from financial planning firm Vanguard show 16 percent of eligible workers made catch-up contributions last year.

[inchworm]

If you ever want to dream of retire ng before 59.5 an investment banker friend of mine says then don’t make your money off limits in one of these gimmicks.

[Chgogal]

Call you House Rep and Senators, pronto.