A widely-used tax benefit allowing workers close to retirement to make extra contributions will undergo changes next year, limiting access for certain high earners.
Recently, the IRS released new guidelines linked to the 2022 legislation, the SECURE 2.0 Act. Starting in the 2026 tax year, individuals with gross incomes of $145,000 or more will be required to contribute catch-up amounts to after-tax Roth accounts.
Currently, until the 2025 tax year, workers aged 50 and above can opt to make catch-up contributions to either traditional pre-tax or Roth accounts, depending on what suits them best.
Previously, contributing to a pre-tax account allowed workers to lower their taxable income through deductions. However, the new regulation means that those high earners above the specified threshold will lose that choice starting in 2026.
The catch-up contributions enable workers to add extra savings to their 401(k) accounts beyond regular contributions.
In 2025, eligible employees aged 50 and older will be allowed to contribute an additional $7,500, on top of the standard $23,500 limit for those under 50.
Additionally, there’s a provision for workers aged 60 to 63, allowing up to $11,250 in extra contributions that same year.
It’s worth noting that workers without a Roth 401(k) option in their retirement plans may have to wait until such an option becomes available to make those extra contributions.
Employers are increasingly offering Roth 401(k) options; for instance, Fidelity has added this option in 95% of its managed plans, a increase from 73% just two years ago. Similarly, 86% of Vanguard-managed 401(k) plans now include Roth options, according to a recent report.
Generally, those who contribute to a traditional 401(k) benefit from an upfront tax reduction but will face taxes on withdrawals down the road.
On the other hand, contributions made to Roth accounts do not offer immediate tax breaks, but the growth and withdrawals can remain tax-free.
