If you’re in your middle years and earning a good salary, get ready for changes in how you contribute to your 401(k) next year.
Back in September, the IRS rolled out new regulations that will alter catch-up contributions starting 2026. Specifically, they’re implementing income tests that could significantly impact high-income earners.
So, here’s the crucial information:
In 2025, all employees can put up to $23,500 into a 401(k). If you’re 50 or older, there’s also the option to make catch-up contributions to save more as retirement approaches.
Typically, these extra contributions could go into either a standard 401(k) or a Roth 401(k). However, beginning in 2026, those aged 50 and above will face a new income threshold. Essentially, to contribute to a Roth 401(k), you’ll need to have earned over $145,000 in the previous year from your job.
The main difference here is in how taxes are applied. Standard 401(k) contributions come from pre-tax income, meaning you can deduct them on your taxes. Roth 401(k)s use after-tax income, so those contributions don’t provide a tax deduction.
This rule, while it might seem minor, could create substantial hurdles for high-income employees. According to YouGov, nearly one in five individuals aged 45 to 54 make over $100,000 annually, which suggests that millions could feel the effects of this new guideline.
If you suspect this change might impact you, it’s a good idea to check with your employer about whether they provide a Roth 401(k) option. Interestingly, the Plan Sponsor Council of America notes that about 93% of employers do offer this kind of plan.
Also, keep in mind that the $145,000 earnings test applies to each employer. So, if you’ve got a new job, only your income from that job will be considered. If you have multiple jobs, your earnings usually won’t be combined unless they share a parent company.
All of this just adds more complexity to the already intricate landscape of retirement savings. It might be smart to consult a financial advisor or accountant to see how these changes might affect you.
For those of you who manage your finances without an advisor and are weighing your options, it may be beneficial to team up with a professional who can guide you through these shifting regulations, especially if you’re a high earner.
This rule change is a reminder that planning for retirement can get tricky, and it may be time to adjust strategies accordingly, particularly as upfront tax liabilities may increase. In some cases, considering alternatives outside of an IRA, such as commercial real estate investments, could offer some tax benefits.
Real estate allows property owners to depreciate the asset’s value over time, offering significant tax advantages down the line, though entry to this market has historically been limited.
There are companies like First National Realty Partners (FNRP) which aim to broaden access to commercial real estate investments, particularly focusing on grocery stores, without the hassles of being a landlord. If you have at least $50,000 to invest, this might be an avenue worth exploring.
Investing in such properties can yield not only passive income but may also help in reducing tax burdens through depreciation.
It’s all about doing your research and understanding the options available to you, especially as the financial landscape shifts.
