From Peter Reagan at Birch Gold Group
If you’re over 50 and planning for your future, you have a lot of decisions to make. You’ll be asking questions like this:
- How much should I be saving?
- How much can I save?
- How can I make up for lost time?
One idea to consider is called catch-up contributions. It’s one of the four secrets of successful savers used to enhance retirement savings.
Here’s a definition, courtesy of Investopedia:
…a type of retirement savings contribution that allows people aged 50 or older to make additional contributions to 401(k) accounts and individual retirement accounts (IRAs). When a catch-up contribution is made, the total contribution will be larger than the standard contribution limit.
For some, catch-up contributions are critical in preserving the ability to retire with financial flexibility. Especially true for individuals who have not been saving for retirement during their life, catch-up contributions may allow some individuals to have tax benefits as they strive to squeeze in retirement savings towards the end of the working career.
Let’s face it: many of us just didn’t start saving early enough or aggressively enough. Later in life, with retirement age approaching, we need to make up for lost time. Catch-up contributions are one way to get back on track.
The IRS constantly changes the limits on how much you can contribute to your retirement in this manner. (Here are the 2023 contribution limits, but remember they’re likely to change annually.)
Catch-up contributions are, by and large, a good thing.
Maybe a little too good. Which is why Congress decided to change them…
Taxation, or retirement account robbery?
Congress passed legislation in 2022 to “help” Americans save for retirement. It’s called the SECURE Act 2.0 (an enhanced version of the rather confusing original SECURE Act).
Now, the SECURE Act 2.0 has some good features (we’ve written about some of the better provisions here). For example, it includes the provision for a government-operated retirement savings “lost and found.” If that functions properly, it could help some people discover forgotten retirement accounts.
One more example of how the Act could benefit all employees who are saving for their retirement using a 401(k):
Under the Act, 401(k) and 403(b) plans established after 2024 will be required to automatically enroll employees at a starting rate of at least 3% of pay and annually increase the rate by 1% until it reaches at least 10% but not more than 15%. Employees can opt out. Some exceptions apply, including businesses with no more than 10 employees and those that have been in existence for less than three years. [emphasis added]
Automatic enrollment in your employer’s retirement savings plan? That’s a no-brainer – auto-enrollment is generally popular and really does result in better outcomes, especially for those who aren’t actively thinking ahead. Granted, employer-sponsored retirement accounts don’t usually offer the level of diversification we want to see. Still this is probably a net benefit.
Like most legislation passed by Congress, there are negative aspects to the SECURE Act 2.0…
Deep in the hundreds of pages you’ll find a rather sneaky tax for higher income individuals. Here’s a summary:
Starting in January 2024, high-income taxpayers (those with earnings in excess of $145,000) wanting to make catch-up contributions to traditional retirement accounts will have those designated as Roth contributions. This change is mandatory and requires that retirement plans be amended accordingly. The objective of treating some catch-up contributions as after-tax Roth is to raise tax revenue to help offset the tax money lost through the saving incentives created by SECURE Act 2.0. [emphasis added]
Essentially, this is a new tax on high earners. To understand how it works, you have to know a little bit more about the different types of retirement savings accounts…
Pre-tax and post-tax contributions
Let’s start with Investopedia’s definition of pre-tax contributions:
…the contribution is made before federal and municipal taxes are deducted. For example, if you put in $10,000 to a 401(k) plan, you do not have to pay tax on that $10,000 of income in the year that it was earned. Pretax contributions are the government’s way of encouraging you to save for your retirement.
Save now, pay taxes later (because Uncle Sam will take his cut in the form of taxes on your withdrawals, down the road in retirement).
After-tax retirement savings are treated differently:
Earnings on after-tax contributions are considered pre-tax and would grow tax-deferred until withdrawals begin. Converting after-tax 401(k) contributions to a Roth account is an option. After converting to a Roth, earnings can grow and be distributed tax-free if certain requirements are met.
By forcing higher-income individuals to shift catch-up contributions to the “after-tax” Roth category, it created a rather sneaky new source of revenue for the U.S. government. (Yes, they need the money – $1 trillion this quarter, just to keep the lights on…)
So what can we do about it?
Securing your savings from the backdoor burglar
Step one is to maximize your pre-tax retirement savings. This isn’t necessarily the right move for everyone (consult a tax advisor), but for most people, postponing taxes until later is a smart move.
Step two is to make sure your savings are safe from other backdoor taxes, especially those even less public than the SECURE Act 2.0 provision. For example, a while back we also discussed one that’s still robbing Americans. It’s called core inflation, which after almost 3 years, unbelievably sits at a 38-year high:
This means the “tax no one voted for,” has been robbing Americans of their wealth every month since May 2021, and hasn’t let up yet (and no “disinflation,” either). Ironically, the Fed usually favors reporting “core” inflation rather than CPI, because it’s usually noticeably lower. But right now it isn’t.
Consider diversifying with physical gold and silver whether you’re making catch-up contributions or just maximizing your retirement savings. Because precious metals have intrinsic value (based on their utility as well as supply and demand), they tend to retain their value especially against inflation over the long haul. That’s just one of the many benefits of precious metals.
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