THE IRS is planning to implement a first-of-its-kind change that will pull a $4,000 tax perk out from under Americans when 2026 rolls around.
The new regulations, affecting catch-up contributions, could take a major hit to certain American workers as they near retirement.
An impending tax change means that certain Americans will miss out on a deduction worth up to $4,000[/caption]
The law will impact how catch-up contributions to retirement plans can be made[/caption]
Catch-up contributions to a 401(k) are optional amounts that Americans 50 and older can contribute to their retirement savings plans, surpassing the standard annual contribution limit, which stands at $23,500 in 2025.
These workers can contribute an additional $7,500 to their plans, bringing the total to $31,000, while a “super” catch up option is available for some Americans age 60 to 63, allowing them to bump up their catch-up contribution to $11,250.
For traditional pre-tax 401(k)s, these additional contributions are deposited into one’s savings plans tax-free and taxed once an individual withdraws the funds in retirement when they are potentially in a lower tax bracket.
However, this major 401(k) tax break will soon no longer be available to certain high earners as the IRS axes the option to make pre-tax catch-up retirement contributions.
The federal tax-collecting agency issued final regulations this month on a law enacted in 2022 called SECURE 2.0 to clarify how the law will work.
According to the IRS, beginning in 2026, Americans 50 and older with an income of $145,000 or more will be forced to make their 401(k) catch-up contributions after tax.
This switch-up means that many top earners will have to pay taxes on catch-up contributions up front during their high-earning years rather than during their lower-earning retirement years.
The money would be put in a Roth account, where the worker could later withdraw it tax-free.
This marks the first time that the IRS is mandating high earners to make their catch-up contributions as Roth, or after-tax, rather than the traditional pre-tax – a change that will give the government its cut up front.
While the Roth catch-up change is beneficial to the federal government, it spells a financial hit for certain Americans.
For example, a 60-year-old in the 35% tax bracket could potentially miss out on a nearly $4,000 deduction for an $11,250 super catch-up contribution.
The worst-case scenario is for high earners without access to a Roth 401(k) option, as plans are not required to offer Roth contributions.
Americans with these kinds of plans will not be able to make catch-up contributions at all, missing out on this handy retirement tool.
HOW DOES THE CHANGE WORK?
The $145,000 threshold for missing out on the pre-tax catch-up option is dependent on a worker’s prior-year income.
Where to save your retirement money
There are several different places where you can put the money you save for retirement. Each has different tax advantages, but not all of them are available to everyone.
401(k) – an employer-sponsored retirement account. Contributions are made pre-tax and many employers will match a certain percentage of your contributions. Taxes are paid when the funds are withdrawn in retirement.
Roth IRA – an individual retirement account. Contributions are made post-tax but withdrawals in retirement are not taxed.
TSP (thrift savings plan) – a retirement savings and investment plan for Federal employees and members of the uniformed services. They work similarly to 401(k)s but may have more limited investment options.
Pension – an employee benefit that commits the employer to make payments to the employee in retirement. Pensions are becoming increasingly rare.
For many people and plans, the new Roth rule will kick in for 2026 contributions.
This means that Americans age 50 or older making more than $145,000 from their current employer in 2025 will likely have to make catch-up contributions after-tax rather than pre-tax when they set their contribution amounts in 2026.
For high earners working two jobs, the income threshold applies individually to each employer the person works for.
Thus, a worker would still be able to make pre-tax 401(k) catch-up contributions next year if their 2025 wages are under $145,000 at either or both employers, Nina Lantz, director of employee-benefits research at actuarial firm Milliman, told The Wall Street Journal.
Because the income limit applies to the prior year at the same employer, new workers could be excluded from the mandatory after-tax requirement in the first year or two, Ian Berger, an individual-retirement-account analyst, told the outlet.
The new rule also will not apply to high-earning self-employed individuals without traditional employer wages, allowing them to keep making pre-tax 401(k) catch-up contributions.
As the IRS plots to implement the Roth change, read up on the urgent warnings about secret fees draining your 401(k) retirement accounts.
Plus, a record number of Americans are now 401(k) millionaires – five tips on how you can be too.
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