Individuals aged 50 and over with higher incomes have been granted an additional two years to allocate pretax funds for their 401(k) retirement savings and similar plans, thanks to the Internal Revenue Service’s postponement of an upcoming mandate.
A pivotal aspect of the comprehensive retirement legislation in SECURE 2.0 was Congress’s insistence that high-income individuals use post-tax dollars for their catch-up contributions. This amendment was conceived, in part, to boost revenue over Congress’s ten-year budget window, which helped to pay for other adjustments, such as pushing back the starting age for mandatory minimum withdrawals from tax-deferred accounts.
In late August, the IRS announced a delay until 2026 for enacting the law initially set for next year. This move offers older employees more leeway in strategizing their retirement savings. Moreover, aiming for a seamless transition to this new arrangement, the IRS decision was made considering employers’ concerns about promptly modifying their systems.
This year, the contribution limit for 401(k) and similar plans is $22,500. Those aged 50 and above are eligible for extra catch-up contributions, allowing them to add an additional $7,500 this year, summing to $30,000. These catch-up contributions can be made using both pre and post-tax dollars.
In conventional retirement plans, contributions are made with pretax money, with withdrawals during retirement being taxed at standard rates. In contrast, Roth accounts involve post-tax contributions, but their growth and subsequent withdrawals can be tax-exempt.
For taxpayers predicting higher taxes during their retirement years, Roth-style accounts are more appealing, while those foreseeing reduced tax rates lean toward traditional accounts.
Imposing a mandate for peak earners to direct post-tax contributions to Roth plans might seem disadvantageous, and it often will be. However, even for high earners, Roth contributions could provide helpful flexibility in the form of tax diversification and lower required minimum distributions.
Regardless of whether you use traditional or Roth savings vehicles, the benefit of the decision is that the choice remains with the retirement savers. And while it may be hard to believe (and only temporary), the IRS just did something we should all be happy about.
Economy
- U.S. equity markets suffered another September setback this week, with the S&P 500 down -1.3%, the Nasdaq down -1.9%, and the small-cap Russell 2000 down -3.6%. Economic indicators continue to show mixed results, creating some level of confusion among analysts.
- The S&P Global U.S. Services PMI was revised lower to 50.5 in August from a preliminary of 51, pointing to the slowest growth in services activity in the current seven-month sequence of expansion.
- The ISM Services PMI unexpectedly jumped to 54.5 in August, pointing to the most robust growth in the services sector in six months, compared to 52.7 in July and forecasts of 52.5.
- The opposing stories S&P and ISM Services told are a function of the surveys. The S&P Services includes a broader array of companies, including many small businesses, while the ISM Services focuses on larger companies.
- The number of Americans filing for unemployment benefits fell by 13K to 216K on the week ending 9/2/23, well below market expectations of 234K, marking the lowest level since February. Meanwhile, continuing claims fell by 40K to 1,679K in the prior week, the lowest since mid-July and sharply under market expectations.
Stocks
- U.S. equities were in negative territory. Industrials and Materials led the decline, while Energy and Utilities outperformed. Value stocks led growth stocks, and large caps beat small caps.
- International equities closed lower for the week. Developed markets fared better than emerging markets.
Bonds
- The 10-year Treasury bond yield increased nine basis points to 4.26% during the week.
- Global bond markets were in negative territory this week.
- Corporate bonds led for the week, followed by government bonds and high-yield bonds.
