Heads up, retirement savers! A significant change is coming to the way you contribute to your 401(k), and it could impact your tax bill. The IRS is shaking things up with the popular catch-up contribution rules, specifically for those nearing retirement.
This shift stems from the SECURE 2.0 Act of 2022, which introduces new regulations. Starting in the 2026 tax year, high earners will face a change in how they make catch-up contributions.
Here's the breakdown: If you earned $145,000 or more in gross income as an individual the prior year, you'll be required to funnel your 401(k) catch-up contributions into after-tax Roth accounts.
Currently, and through the 2025 tax year, workers aged 50 and older have the flexibility to choose where their catch-up contributions go – either a traditional, before-tax account or a Roth, after-tax account. The choice depends on your preference and your retirement plan's options.
The benefit of contributing to a traditional 401(k) is the immediate tax break through a deduction, which lowers your taxable income. But here's where it gets controversial... this option will be limited for high earners once the new rules kick in.
Catch-up contributions are a bonus, made in addition to your regular 401(k) contributions. For 2025, if you're over 50, you can contribute an extra $7,500 in catch-up contributions, on top of the standard contribution limit of $23,500 for those under 50. And, there's an even higher limit for those aged 60 to 63, allowing up to $11,250 in catch-up contributions in 2025.
And this is the part most people miss... If your employer-sponsored retirement plan doesn't currently offer a Roth 401(k) option, you might be unable to make catch-up contributions until one becomes available.
Good news, though! Many employers are adding Roth 401(k) options. Fidelity now includes it in 95% of its managed plans, up from 73% two years ago. Vanguard also offers Roth options in 86% of its 401(k) plans.
Let's clarify the tax implications. Traditional 401(k) contributions offer an upfront tax break, but you'll owe income taxes when you withdraw the money in retirement. Roth accounts, on the other hand, don't give you an immediate tax break, but your money grows tax-free, and withdrawals in retirement are also tax-free.
What do you think about these changes? Do you believe this will help or hurt retirement savers? Share your thoughts in the comments!
