Changes to 401(k) Contributions for High Earners

A notable tax benefit for those approaching retirement—specifically the ability to make additional contributions—will see some changes next year, particularly affecting higher-income individuals.

Recently, the IRS implemented new guidelines connected to the SECURE 2.0 Act from 2022. Starting in tax year 2026, individuals earning over $145,000 in the preceding year will face restrictions on making catch-up contributions to their 401(k) accounts, particularly those tied to after-tax Roth accounts.

Currently, workers aged 50 and above can make catch-up contributions to either a pre-tax traditional account or a state pension account until 2025. The choice between Roth after-tax accounts often depends on individual retirement strategies and preferences.

Previously, by contributing to a traditional 401(k), individuals received significant tax relief upfront, allowing them to lower their taxable income. However, the new regulations mean that those high earners will lose this tax break starting in 2026, which might require some reconsideration of their retirement strategies.

Eligible workers aged 50 and older can add an extra $7,500 in catch-up contributions in 2025, alongside the standard contribution limit of $23,500 for those under 50. For workers aged 60 to 63, this limit increases to an additional $11,250.

Those whose employers haven’t yet adopted a Roth 401(k) option may find themselves unable to make these extra contributions until that option is made available. Interestingly, many employers are starting to add Roth options. According to a report, 95% of managed plans now offer Roth, a significant increase from two years ago.

In a traditional 401(k), contributions allow for immediate tax deductions, but withdrawals in retirement will be taxed. On the other hand, Roth account contributions do not offer upfront deductions, but they grow tax-free, which can be a significant advantage in the long run.