The IRS Just Changed the Rules About 401(k)s (What You Need to Know)

401ks, so when there’s a change, we gotta load you up. Brian, I am excited about this one because, like you said, things they are a change, and even some of the things that are changing are now changing from the way that they changed the last time that they changed. And what we want to be able to do is make sure that you guys can keep it all straight, so you know what to expect when it comes to this amazing wealth-building tool at your disposal. Yeah, our favorite taxing Uncle, Uncle Sam, you know he heard what the legislators said, and he’s like, ‘Wait a minute, guys, have y’all really thought about this?’ Look, let’s hit the pause button on a few things. So that’s why we just want to load you up.

But I think it’s first the—I want to set some context here. In this crazy world we live in now, there are so many influencers and TikTokers. I mean, we’ve actually created our own little genre of TikTok reacts and other things off of this. I wanted to give people the understanding of why we actually do like 401ks. Yeah, we love 401ks, and there are a number of reasons why. The first of which are the tax benefits. You’ve heard us say this a thousand times: 401ks are employer-sponsored retirement plans and are one of the very best ways to legally hide money from the government. You can either hide money from the government now this year with present tax benefits, or you can hide money from the government in future years with Roth benefits. 401ks are an amazing mechanism to allow you to let your dollars work in an incredibly tax-efficient manner.

Okay, let me tell you about my favorite tax benefit out there. Exactly, not a taxpayer? It’s free money, guys. Who in the world doesn’t like free money from your employers? I mean, talking about a guaranteed 50 to 100 rate of return, that is what 401ks can do. And then on top of that, the forced discipline. You know, I just had a conversation, Bo, where we were talking, and I was like a lot of people, I feel like, whether it’s money-saving habits, whether it’s relationships, when you feel like you can let your behavior make you pull out of something even before it gets good, you miss out on the best part. So if you have a ride-or-die type mentality, 401Ks, since you can’t touch them until you hit retirement age and they also require you to have contributions to get the employer match, that forced discipline is very powerful.

And then the last thing is that there have been a number of studies that have found that most millionaires actually hit their millionaire status through their employer-sponsored plan. So the first account that actually crosses over that million-dollar mark or at least a large portion of it exists in that employer-sponsored 401k. So people that are successful, people that have built wealth, they use this tool. So why on Earth would you not want to use the tool as well? Now, fortunately, none of this great stuff is changing. It’s all stainless. I mean, so let’s nerd out a little bit; let’s go a little bit deeper because this is the part where like I said, our favorite taxing uncle is like, guys, we’ve got enough feedback, we can’t do everything that the legislation kind of laid out for. But let’s walk through, go ahead and share with them what did the legislators want to do and what did Uncle push back on?

Yeah, so for those of you who don’t remember, Secure 2.0 was passed in December of 2022. One of the provisions that a lot of people talked about, that a lot of people were clueing into, is that for folks that were 50 or older or maybe folks that happen to be turning 50 in any specific given year, guilty as charged, earned over $145,000 or more in the preceding year would be required to make their catch-up contributions on a Roth basis. As it stands right now, if you’re someone contributing to a 401k and you’re over 50, you can do a $22,500 salary deferral, and you can do another $7,500 catch-up contribution. And right now, you’re gonna like to have all of that be pre-taxed.

Well, with Secure 2.0, they were changing the way that was going to operate for high-income individuals. Before you talk about what change, I always like to give a little extra context. I think people are like, ‘Why was this even written in this? It seems like such an obscure thing.’ Y’all remember whenever they do this type of tax reform or legislation, there’s lots of negotiations going back between the aisles, and they’re also trying to figure out how they’re going to pay for this thing, and they have to get the CBO’s approval and show the taxpayers that they haven’t essentially given away the farm or overtaxed an industry here or there. So when they’re getting down to those final moments, they’re squeezing the balloon however they can, and you can quickly see if they take away the ability to take tax deductions on these catch-up contributions and now make them after-tax or Roth, meaning they’re going to take the taxes on the front end, that you could actually pick up a little bit, and if you’re close enough to getting this thing approved, this is the type of stuff in the legislation that happens. It’s no different than when you’re negotiating with your car, and you get to the point where you, you really get it to a standstill with the dealership, and they won’t come off anymore, you say, ‘Give me some free formats. How about giving me those all-weather free formats or give me four oil changes?’ And they’re like, ‘All right, you know, that’s okay. Let’s do it.’ That’s what this was.

But I think what they weren’t thinking about, it seemed like a perfect solution for the legislators, but they didn’t think about what does this actually look like in implementation form, and that’s where this thing fell off. Yeah, so what happened is the legislation originally passed in December of ’22. So the thought was that for those right now in 2023 that are turning 50 or over 50 and make more than $145,000, starting in January of next year, there was likely going to be something you needed to do. There was likely going to be a change. Well, what they have now come out and said is they have now postponed this to 2026. And I think it let, exactly like you said, there are going to be some logistics around this. A lot of third-party administrators and payroll companies are going to need to figure out how are they going to roll this out? How are they going to get the different providers on the same page to make this available? Because as soon as this legislation came out, a lot of people started asking questions. Well, what if my employer doesn’t offer Roth? Then I’m over 50, and does that mean that now I can’t do catch-up contributions if Roth? There were a lot of questions out there, and they recognized it. In order to take some time to figure out what this is going to look like, we need to kick the can down the road a little bit further.

Now, I do want to clarify, this does pertain also to 403(b)s, 457s, it’s really any of those qualified employer-provided retirement plans. They’re going to push us off. They’re going to basically say, “Hey, give us a little more time so that the private industry that actually, you know, does all the administration and handling of 401ks can actually figure out how logistically we’re going to make this happen.” So stay tuned, and by the way, whenever we get updates, we’ll keep you posted.