Starting in the 2026 tax year, older workers with incomes exceeding a certain limit will be unable to make traditional 401(k) catch-up contributions. Specifically, those over 50 who earned more than $145,000 in the previous year will only be allowed to make post-tax (Roth) catch-up contributions. The IRS plans to evaluate the final regulations and keep a transition period in place until the end of 2025 to facilitate planning and adjustment.
What’s changing?
- The 401(k) reforms require high-income earners to use after-tax contributions for catch-up contributions. This change aims to increase federal income while still allowing catch-up options and preserving tax-free savings for retirement. The initial proposal stems from discussions aimed at reforming retirement savings and closing loopholes for the wealthy.
- For the year 2025, the employee contribution limit will be set at $23,500, with an additional standard catch-up of $7,500 for those aged 50 and above. Importantly, there will also be a new “super” catch-up contribution opportunity for individuals aged 60 to 63, potentially increasing their limit to $11,250.
- Final regulations will take effect in 2027, but compliance with the new catch-up requirements will begin in 2026. Employers can start implementing these changes earlier during the transition.
Impact on older Americans
- High-income individuals over 50 may see an increase in their tax bills this year since their contributions will now be made using after-tax dollars. However, if they anticipate higher taxes in retirement, this shift could offer benefits down the road.
- Employers without a Roth option are encouraged to adopt one to better support their employees’ saving strategies as the new regulations come into effect. The rules will also clarify how to evaluate earnings across associated companies.
- For those aged 60-63, the options for catch-up contributions will allow for faster savings growth, but only after the new regulations are in place will the implications of after-tax treatment become clearer.
Are most Americans on track?
- Surveys indicate that many Americans believe they need approximately $1.26 million to retire comfortably—an amount that often exceeds typical savings levels, illustrating a disconnect between aspirations and reality.
- The average balances in 401(k) accounts reflect ongoing disparities, with many savers not feeling confident about meeting their retirement needs despite being engaged with workplace savings programs.
- While many individuals express optimism about their retirement prospects, it’s important to consider potential risks like market fluctuations, longevity, and healthcare expenses that could impact their plans.
What to see from 2025 to 2027
- Employers must implement changes to their retirement plans to include new catch-up features and ensure compliance with the updated regulations by December 31, 2025.
- Participants in the 60-63 age bracket should review their retirement plans to see if they can utilize the new super catch-up features and understand how these changes could impact their saving strategies.
- The final regulations will include guidelines on wage aggregation across employers, making it essential for timely updates and transparent communication with participants as these new rules are introduced.
