Expat 401k catch up contributions: not all they’re cracked up to be!

Good news! Change number 237 of the Secure 2.0 Act was just announced. This latest change involves changes to how 401K catch up contributions for people over 50 earning more than $145,000 are treated.

The SECURE Act changed everything

Before the passage of the new Secure Act last year, employees over 50 with a 401K could make an extra contribution to their plan ($7,500 in 2023) and it was in pretax dollars, which would help lower taxable income. 

With the passing of the law, starting in 2024 if a person earned more than $145,000, then their catch-up contribution would have to be made as a Roth 401K. In other words, the catch-up contribution would be made with after tax dollars. 

The good news is that this change will now take place in 2026 instead of 2024.  So, if you are someone who will be affected by the change, you would want to make sure that you maximize your catch-up contributions over the next two years to take advantage of the tax break.

US expat catch up contributions

If you are a US Expat making catch up contributions while living overseas, this could be even more relevant.  Some countries view withdrawals from a Roth IRA or 401K as taxable, so having money in these types of accounts does not help in the future. If you put money in them now, you do not receive the tax break, so it is a double whammy. 

The catch up contributions of US Expats living in Israel may be affected as there is no clarity as to whether Roth IRAs would be taxed once Israel becomes your tax domicile. Therefore, we believe it is best to be conservative and not make the post-tax contribution.

As you may recall, Israel gives a ten-year tax exemption on foreign income for new immigrants (Olim Hadashim) and Israelis who moved back home after more than ten years abroad (Toshav Hozer Vatik).  After ten years Israel becomes your tax domicile, and you may not enjoy every tax break that was afforded to you in the US.

The bottom line is that if you are a high earning expat who is making catch up contributions to a 401k, making sure you maximize your contributions over the next two years will have the maximum benefit on your current tax bill.

We are expat financial advisors located in Israel and the US, serving expats globally.

If you are moving to Israel or another country and don’t know where to start when it comes to the financial side of things, or hold US or foreign assets and need help figuring out your retirement as an expat, please contact us.

Have questions about retiring in Israel? We’re having a series of webinars in 2024 on this topic. We’re also publishing blogs on this subject.

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Nardis Advisors LLC (“Nardis”) is a Registered Investment Advisory Firm regulated by the U.S Securities and Exchange Commission in accordance and compliance with applicable securities laws and regulations. Registration does not imply a certain level of skill or training. Nardis does not render or offer to render personalized investment advice through this medium. The information provided herein is for informational purposes only and does not constitute financial, investment or legal advice. Investment advice can only be rendered after delivery of the Firm’s disclosure statement (Form ADV Part 2) and execution of an investment advisory agreement between the client and Nardis.

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