Last week the market was essentially flat, although it was up and down on a daily basis. And while 2025 has the S&P 500 down about 3.5%, the index is over 8% higher than one year ago. Just like criticism sticks with us longer than praise, we remember the loss of this year more than the gains of last year.
I want to correct a few misperceptions I continue to hear when it comes to employer-sponsored retirement plans like 401(k)s, 403(b)s, and the Thrift Savings Plan. These are all called “qualified accounts” in that they qualify for special tax treatment.
The first myth is that if you contribute to the Roth portion of your retirement plan, you don’t receive your employer’s match. This is absolutely false. Until 2023, employer contributions were always made to the traditional, or pre-tax, part of your account. But the match was available regardless of whether employee contributions were made to the traditional or Roth bucket.
Starting in 2023, the law allows participants to choose if employer contributions would be pre-tax or Roth. This is a big decision, as it can impact your tax bill significantly. I suggest doing tax planning with your advisor before you make any changes.
The second myth is that there are income limits for Roth contributions to your employer-sponsored retirement plan. There are income limits for contributions to a Roth IRA, but not for 401(k)s, 403(b)s, TSP, and other employer-sponsored plans. Again, deciding to contribute before or after tax should be part of your larger financial plan. If you are in a higher bracket now, it may make sense to contribute pre-tax, and then do Roth conversions in retirement.
The third myth is that catch up contributions are a separate contribution, or that you have to write a check or transfer money to make them. In reality, once you turn 50, your contribution limit increases from $23,500 a year to $31,000. If you are ages 60-63, you can contribute a total of $34,750. If you’ve hit any of these milestones, and you can afford to increase your savings, you just adjust your regular contributions that come out each paycheck.
Starting next year, if you make over $145,000, any catch-up contributions will automatically be Roth, or after-tax, contributions. The government has figured out that, generally speaking, people who can afford to fully fund their retirement plan are often in a higher tax bracket – and they want those tax dollars now, and not when you’re potentially in a lower tax bracket after retirement.
Your action item this week is to check your retirement plan. How much are you contributing, and are you receiving the full match? Can you contribute more? Are you invested appropriately for your time until retirement?
And of course, check out our website at covingtonalsina.com, or our Facebook page, for more information and our upcoming educational events.
CovingtonAlsina is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.