The SECURE Act was passed in 2019, and was followed by a second bill, generally referred to as SECURE 2.0, in 2022. A provision of SECURE 2.0 stated that high-income earners would no longer be allowed to make catch-up contributions to their 401(k) on a tax-deferred basis. It has been nearly three years since the bill passed, but just this month, the IRS finally provided clarity on when and how these new rules would be implemented. Read on to see if you will face changes to 401(k) contributions and how to navigate them.
What are catch-up contributions?
In 2025, the annual limit for 401(k) contributions is $23,500 for anyone under the age of 50. If you are over 50, the limits are higher, allowing you to make additional contributions, called catch-up contributions.
What are the current catch-up contribution limits?
For most people over 50, the allowable catch-up contributions are $7,500 per year. For those between ages 60 and 63 at the end of the year, there is a ‘super catch-up’ limit that caps out at $11,250. These higher limits allow you to contribute a max of between $31,000 and $34,750 to your 401(k) each year, depending on your age. These limits aren’t changing as part of the new regulations.
What is the difference between a traditional 401(k) contribution and a Roth 401(k) contribution?
Contributions made to a traditional 401(k) reduce the amount of income reported on your current tax return. If your salary is $200,000 and you contribute $20,000 to a traditional 401(k), your taxable salary would be $180,000. If your top federal tax rate is 24% and your state’s tax rate is 4%, every dollar contributed to your 401(k) would save you $.28.
Your contributions are invested, and when you ultimately take money out of your 401(k), you pay tax on every dollar distributed. In other words, you get a deduction now, your money grows tax-deferred, and you pay taxes later when you take money out. This can be quite powerful if you are in a high tax bracket during your working years.
Conversely, contributions to a Roth 401(k) don’t reduce your taxable income annually. Instead of a tax break up front, Roth investors get their tax break when they take money out of the plan as qualified distributions from Roths are tax-free. You get no tax deduction now, your money grows tax-free, and you pay no tax later when you take money out. This is often ideal if you are a younger worker or aren’t in a high tax bracket during your career.
Deciding whether to contribute to a traditional or Roth 401(k) depends on a few factors, but a simple framework to think about it is to ask yourself, “Am I in a higher tax bracket now while I’m working than I will be when I retire?” If the answer is yes, as it is for many high-income earners, then the immediate deduction gained by contributing to a traditional 401(k) is often beneficial.
What is changing because of Secure 2.0?
Currently, you have the flexibility to decide if you want contributions to go to a traditional or Roth 401(k). If your employer offers a Roth 401(k), you can split your contributions in any proportion between the two types of plans.
SECURE 2.0 takes away some of this flexibility. You may still allocate the first $23,500 of contributions any way you like – traditional or Roth. But catch-up contributions must go to the Roth 401(k) if your prior year income exceeds around $145,000
Notably, this is a per-person limit, not per household, and it is per employer. So, your individual income must exceed $145,000 at one employer before you must make catch-up contributions to the Roth plan. If you earn more than $145,000, but at multiple employers, the pre-tax catch-up contributions will still be available. And since the limits are based on your prior-year income for the employer, new employees might avoid the Roth requirement on catch-up contributions in the first year.
When do the changes take effect?
The IRS recently indicated that the rules will apply to most plans beginning in the 2027 tax year. Employers can voluntarily implement the changes early, and some government or collective bargaining plans may have later start dates for the new rules.
Employers who want to continue offering catch-up contributions as part of their plans will be required to offer a Roth option by this time, particularly if they have any employees who are subject to these requirements. If they don’t, the plan would be out of compliance, and employees wouldn’t be allowed to make any catch-up contributions at all.
What steps can you take to prepare for the new rules?
If your income exceeds $145k at one employer, be prepared for your catch-up contributions to go to the Roth 401(k) starting in 2027. This will increase your taxable income between $7,500 and $11,750, depending on your catch-up contribution amount.
The additional tax due will depend on your tax bracket. For example, if you are in the 24% bracket, an extra $7,500 of income will cost $1,800 in tax, while someone in the 37% bracket will pay an extra $2,775. The additional income will increase your federal, state, and local taxes, so all three rates should be considered as you plan to pay more.
Many taxes, deductions, and credits are based on your overall income, and income levels impact your ability to contribute to plans like Roth IRAs (not Roth 401(k)). That’s why it is important to consider all the ways higher income might affect your cash flow and taxes, not just the additional tax on the catch-up contributions.
You may also want to reevaluate your investments inside your 401(k). Investments inside Roth accounts grow tax-free, so it is often beneficial to put more growth-oriented investments like stocks inside a Roth.
What’s the bottom line?
Ultimately, this change has the largest impact on high-income earners, who typically receive the greatest tax benefit on catch-up contributions. If you fall into this category, take the time between now and the end of next year to understand how the new rules will affect you.
While being required to use a Roth for catch-up contributions will have an impact on your immediate cash flow and taxes, keep in mind that there are many benefits to having money inside a Roth account. You’ll be building a larger bucket of money that grows tax-free and gives you more flexibility for distributions once you retire.
