Heads up, retirement savers! A significant change is coming to how you handle those extra 401(k) contributions as you approach retirement, and it could impact your tax bill. Let's break down what's happening and what it means for you.
The IRS is shaking things up with a popular tax break designed for those nearing retirement. This change stems from the SECURE 2.0 Act of 2022 and will affect how high earners make 'catch-up' contributions to their 401(k) plans. But here's where it gets controversial...
Starting in the 2026 tax year, high earners—specifically, those with a gross income of $145,000 or more as an individual in the prior year—will be required to make their catch-up contributions to after-tax Roth accounts. This is a big shift from the current rules.
Currently, and through the 2025 tax year, workers aged 50 and over have the flexibility to choose where to put their catch-up contributions: either a traditional, before-tax account or a Roth, after-tax account. It all depends on their preference and what their specific retirement plan allows.
So, what's the difference? Well, making catch-up contributions on a before-tax basis offers an immediate tax benefit. You get a deduction that lowers your taxable income right away. But this new rule means high earners will lose that option starting in 2026.
Catch-up contributions are, as the name suggests, extra contributions you can make in addition to your regular 401(k) contributions. In 2025, if you're over 50, you can contribute an extra $7,500 to your 401(k) through catch-up contributions, on top of the standard contribution limit of $23,500 for those under 50. And for those between 60 and 63, there's an even higher limit: 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 Roth 401(k) options, you might be out of luck when it comes to making catch-up contributions until your plan catches up.
The good news is that more and more employers are adding Roth 401(k) options. For example, Fidelity now includes it in 95% of its managed plans, up from 73% just two years ago. Vanguard is also on board, with 86% of its managed 401(k) plans offering a Roth option.
But what about the tax implications? Well, those who contribute to traditional 401(k) accounts get that upfront tax break. However, they'll owe income taxes when they eventually withdraw the money in retirement. Roth accounts, on the other hand, don't offer an immediate tax break, but your money grows tax-free, and withdrawals in retirement are also tax-free.
Now, here's a question for you: Do you think this change is fair to high earners? Does the loss of the upfront tax break make Roth contributions less appealing? Share your thoughts in the comments below!
