Major changes are on the horizon for 401(k) plans that could affect tax breaks for high-income earners, according to experts.
As we look toward 2025, employees will have the opportunity to defer up to $23,500. For those aged 50 and above, there’s an extra $7,500 allowed, labeled as a “catch-up contribution.” Interestingly, for individuals aged 60 to 63, this catch-up limit increases to $11,250.
Now, catch-up contributions are usually made through pre-tax or post-tax Roth options, depending on what the 401(k) allows. However, with changes brought by the Secure 2.0 Act of 2022, certain high-income earners will soon face restrictions.
Starting in 2026, if you earn over $145,000 from your employer in the previous year, you’ll be required to make your 401(k) catch-up contributions as after-tax Roth contributions.
Fixed income strategy details:
Information geared toward those who are retired or approaching retirement, focused on establishing and maintaining stable income streams:
Conversely, older workers still have the flexibility to choose between traditional contributions and Roth 401(k) catch-up contributions if their plan allows for it.
With traditional deferrals, you get a tax credit upfront, but you’ll owe ordinary income taxes upon withdrawal. In contrast, Roth contributions do not offer a tax break initially, but the earnings are tax-free when withdrawn.
“It’s essential now to collaborate with your advisor and tax professional to form a multi-year tax forecast,” says Patrick Huey, a certified financial planner in Portland, Oregon.
This strategy could help in deciding whether to accelerate pre-tax catch-up contributions before 2025 or opt for Roth contributions sooner, according to experts.
Choose between pre-tax and Roth 401(k)
In 2024, almost all retirement plans allowed for catch-up contributions; however, only 16% of covered workers actually made these deferrals, based on a 2025 Vanguard report that analyzed over 1,400 plans and nearly 5 million participants.
Most individuals making catch-up contributions had incomes exceeding $150,000, per the report.
However, the choice between Roth and pre-tax catch-up contributions can vary due to factors like current and anticipated future tax brackets. It’s also wise to consider your effective tax rate when planning for retirement or traditional financial goals.
CFP Jared Ghani, a private wealth manager at Claro Advisors in Boston, emphasizes that investors shouldn’t delay and should engage with the new rules as they evolve.
