Catch-up 401(k) contributions will change next year for some older Americans, but whether it’s good or bad depends on your tax outlook, experts said.
In 2026, Americans aged 50 and older earning at least $145,000 in the prior year must make their catch-up contributions to a Roth 401(k), the IRS said. The rule was part of Secure Act 2.0 to go into effect from 2024 but was delayed, giving companies time to comply. It’s the first mandatory Roth provision ever added to the tax code.
Since Roth 401(k) contributions are made after-tax, there’s no upfront tax deduction for the money set aside for retirement. Instead, money grows and comes out tax free. The change-up may force older savers to take a fresh look at their tax situation, now and in the future, experts said.
“Maybe this is bad, but maybe not,” Isaac Bradley, director of financial planning at HB Wealth, told USA TODAY. “It depends on where you think your tax rate will be.”
What are catch-up contributions and the new rules?
For 2025, Americans aged 50 and older can save an additional $7,500 annually in their employer-sponsored 401(k) plan, bringing their total contribution limit to $31,000.
Those aged 60 to 63 may contribute an extra $3,750, bringing the year’s total allowable 401(k) contribution to $34,750.
At 64 years, the catch-up reverts to $7,500.
Since these amounts are adjusted for inflation each year, they’ll likely be higher in 2026.
If employers offer a Roth and traditional 401(k) in 2026, only employees who earned less than $145,000 the prior year at their current company can choose where to put their money. Those above the wage threshold must contribute their catch-up contributions to the Roth 401(k).
If the company doesn’t offer a Roth 401(k), those high earners can’t make any catch-up contributions.
What do tax rates mean for Roth 401(k)?
- If tax rates rise in the future, tax-free Roth 401(k) withdrawals become more valuable, said Steven Conners, founder and president of Conners Wealth Management.
- If tax rates drop, then you would have paid a higher tax on your money, experts said.
- If tax rates are the same, “it doesn’t matter where you put your money because you’ll have the same amount of money,” Bradley said. For example, if $100 contributed to a traditional 401(k) doubles to $200, but you must pay income tax of 20% tax, or $40, the result is $160, he said. Compare that to paying 20% income tax upfront on $100, which leaves an $80 contribution to a Roth 401(k) that doubles to $160, Bradley said.
If the stock market or the value of your portfolio soars, tax rates may not bother you at all in the end, Conners said.
The new rule may force workers to pay the tax upfront and use a Roth 401(k), “and you may not like it, but let’s say you have 200% gains and don’t have to pay a cent on any of those gains,” Conners said. “When you pull those funds out tax-free, you’ll love it. It’ll be delayed gratification instead of instant gratification.”
All three major stock indexes – the blue-chip Dow, the broad S&P 500, and tech-heavy Nasdaq – have all posted double-digit returns in each of the past couple of years and look on pace to do so again.
Are people usually in a higher tax bracket when they retire?
Since most retirees no longer collect a regular paycheck, their income drops, and so do their tax rates.
But reality isn’t always so simple, some experts said. How much you saved in traditional IRAs and 401(k)s, withdrawals, and Social Security can set off a “ticking tax bomb,” they said.
“In retirement, you have go-go, slow-go, and no-go years,” said John Jones, investment advisor representative at Heritage Financial.
During “go-go” years, people are still healthy and want to travel, celebrate and check off bucket list items, so they may take larger withdrawals, Jones said. In “slow-go” years, withdrawals shrink as retirees settle down. “No-go” years may see withdrawals grow again with required minimum distributions (RMDs), higher health care costs or a “can’t take it with you” attitude, he said.
Americans aged 73 must start taking minimum withdrawals annually from pre-tax, traditional retirement accounts. The larger those nest eggs, the larger the required withdrawals. Add in Social Security, and a single filer could “easily” be near the 22% income tax rate, Bradley said.
Why is the government making these 401(k) changes?
The government is hunting for money to help cover its massive spending, experts said.
“Roths (accounts) pay tax on the front end, so that helps with the math,” to make recent spending bills more palatable, Bradley said.
