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This year, a new IRS rule will reshape 401(k) plan contributions for millions of workers. Originally a part of the SECURE 2.0 Act of 2022, this rule changes how high-income Americans can save for retirement — particularly as it relates to catch-up contributions.
Here are all the details you need to know about how the new rules affect your 401(k) plan.
What are catch-up contributions?
When it comes to contributing money to retirement accounts, employees have annual contribution limits set by the IRS – or the maximum amount they are legally allowed to contribute per calendar year. However, employees age 50 and older are allowed to make additional catch-up contributions – amounts beyond the standard, annual limit that are designed to help employees “catch up” on retirement savings if they have fallen behind.
according to irFor the 2026 tax year, workers under age 50 are allowed up to $24,500 in retirement contributions; Workers over 50 are allowed an additional $8,000 in catch-up contributions.
Previously, employees had the option to allocate these catch-up contributions to either a traditional 401(k) account – using pre-tax dollars – or a Roth 401(k) – using after-tax dollars. However, starting in 2026, if employees earned more than $150,000 in the previous year, their 401(k) catch-up contributions must go into a Roth 401(k). This new regulation will apply not only to the traditional 401(k), but also to the 403(b), 457(b), SEP IRA, and SIMPLE IRA.
How should high-income workers prepare for this new rule?
According to financial experts, the new rule won’t significantly change the way employees save for retirement, but it may require them to take some steps in preparation:
Review Income and Retirement Contributions
Director of Planning and Advice major moneyTina A. Myers suggests reviewing your annual income, prior year’s salary and retirement contributions before the year ends to see if this new regulation will affect you. If you’re already using the all-Roth system or make less than $150,000 annually, nothing will change for you. If you were using a traditional 401(k) plan and/or earned more than $150,000, read on.
Find out if your employer-sponsored plans support Roth contributions
“If your employer does not offer the Roth 401(k) option by 2026, you will not be allowed to make catch-up contributions at all,” said CFP and content director Andrew Latham. supermoney.com. So check with your employer and pressure them to comply if they aren’t already doing so. Fortunately, more employers have adopted Roth 401(k) options over the past few years in preparation for this new regulation.
If it turns out your employer doesn’t offer a Roth 401(k) option and you don’t want to completely lose the opportunity to stash away extra savings, Latham suggested some fallbacks: maxing out a Roth IRA in addition to your traditional 401(k), funding an HSA (if eligible) or creating taxable brokerage accounts to grow your tax-diversified bucket.
Check your payroll setup
If HR has confirmed that the Roth option will go into effect by 2026, check your payroll setup to make sure that catch-up contributions will be coded as “Roth.” Don’t risk losing catch-up contributions due to a technical error.
Consider How Roth vs. Pre-Roth Fit into Your Comprehensive Retirement Plan
Roth 401(k) options help reduce overall taxes and support more strategic income planning during withdrawal years. Additionally, while short-term taxes will increase, this new regulation may actually result in a beneficial hedge against future tax rate increases and provide more tax diversification in retirement. But, for those who believe they will be in a lower tax bracket in retirement, using pre-tax vehicles such as traditional IRAs may be beneficial. Keep your long-term plan in mind and decide which move makes sense for you.
Consider Investing More Aggressively
Should workers invest differently as a result of this new regulation? Associate Wealth Manager Fairway Wealth Management LLC, Alex Cañitano, suggested they do so. Because withdrawals won’t be subject to taxes when distributed, he advised investors to be more aggressive with their Roth dollars than with money in their traditional 401(k) accounts.
“Grow your Roth money as much as possible,” Cañitano said.
However, it is important to note that people who are nearing retirement should be mindful of their risk tolerance. Near term withdrawals may reduce the possibility of completing risky investments when needed.