Two Tax Changes That Will Surprise Most of You:
Some of you may have heard if you have high income (defined as wages >$145,000 per year), that you're no longer eligible to get a deduction on your catch-up contributions. You may even have gotten a notice from your plan provider with scary language like, "IRS TAX NOTICE" on it. No need for panic. You can still make pre-tax contributions through 2025.
In 2026 and beyond though, that last $7000 will be redirected to an after-tax, or a Roth account. A high earner over 50 will probably contribute $22,500 to their pre-tax 401k account, and $7500 to their Roth 401k account. This means they'll likely have a higher tax bill because they have $7500 more in taxable income. Don't let this catch you by surprise, always plan ahead, and always make sure you have plenty of money in your emergency fund to pay unexpected bills (like higher tax bills).
A related heads-up: 2026 will likely be a higher tax year for a lot of people, and not just because of the change in catch-up contributions. 2026 is the first year after expiration of the Tax Cuts Jobs Act, when rates revert to their higher, 2017 levels. Preparing for a higher tax bill in that year is a very good idea. Between now and then, make sure that you aren't stretching your budget and cash flow to the limits, because you may have to come up with an extra few thousand dollars for taxes in that year. Either you'll have lower take-home pay, or you'll have a nasty surprise at tax time. Neither one is very fun, particularly if you're already in a strained position.
How do you avoid this trouble? If you're already in a tight spot financially, look at either cutting your spending or growing your income, and do so urgently. Additionally, now is not a good time to be adding new debt to your balance sheet, particularly if it means that you won't have any wiggle room after that new purchase (be it a car, boat, house, ATV, whatever...). Not only are interest rates (and interest payments) much higher than they were, but your budget may already be under pressure from inflation. You don't need to make a hard situation worse. Finally, even if you're currently doing fine, be sure to factor in the effect of higher tax rates on the horizon. If you're not careful, you might have less cushion than you think.
Bonus: A Tax Planning Rule of Thumb: "What should I contribute to?"
A lot of plans have the option to make contributions either pre-tax (meaning you get a deduction), or Roth. I'm oversimplifying, but as a rule of thumb, you want to do pre-tax if you're in a higher tax bracket today than you will in retirement. Conversely, if you're in a lower tax bracket today than you will in retirement, Roth makes more sense. The overarching goal is to pay taxes at the lowest possible rate. If you're in a high tax bracket, take the deduction. If you're in a low tax bracket, pre-pay those taxes.
What usually happens is that people go Roth in the first half of their careers, and pre-tax in the second half. This is based on the assumption that most young folks are earning less money, and are in a lower tax bracket vs where they will be later on. Which makes sense. People typically enter their peak earning (and peak tax-paying) years in their late 40s and 50s.
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