New 401(k) Catch-Up Rules Impact Higher Earners in 2026
Since 2002, retirement savers aged 50 and above have been able to make catch-up contributions to their 401(k) plans, allowing them to exceed standard employee contribution limits. Initially capped at $1,000 annually, these catch-up amounts expanded to $7,500 by 2025. Contributions to tax-deferred retirement plans are excluded from adjusted gross income, reducing tax bills. For instance, a 50-year-old contributing the maximum $23,500 plus a $7,500 catch-up in 2025 could shield $31,000 from taxes, yielding a $7,440 tax break for someone in the 24% bracket.
Secure 2.0 Eliminates Tax Breaks for High Earners
However, starting in 2026, a new provision from Secure 2.0, effective January 1, 2026, removes these tax breaks for certain retirement savers. Individuals earning over $145,000 in prior-year wages from their current employer, adjusted for inflation, can only make catch-up contributions to a Roth 401(k). This means contributions are taxed upfront, unlike traditional 401(k) plans where taxes are deferred.
For a higher-earning 50-year-old contributing the maximum $8,000 catch-up to a Roth 401(k) in 2026, this results in about $1,920 more in taxes paid upfront, assuming a 24% tax bracket, compared to a traditional 401(k). This change makes catch-up contributions less attractive, especially for those expecting lower tax brackets in retirement.
Reasons to Continue Making Catch-Up Contributions
Despite the loss of upfront tax breaks, making catch-up contributions remains beneficial for those behind on retirement savings. Contributing the full $8,000 catch-up annually from age 50 to 65 can total $120,000 or more. For ages 60 to 63, a super catch-up of up to $11,250 per year is available, with the same rules applying to higher earners.
A 50-year-old maximizing catch-up and super catch-up contributions could accumulate around $200,000 in a Roth 401(k) by age 65, assuming a 5% annual return. The Roth 401(k) offers several tax advantages:
- Tax-Free Withdrawals: Qualified distributions after age 59½ from accounts open at least five years are not subject to ordinary income or capital gains taxes, and there are no required minimum distributions.
- Tax-Free Growth: Annual distributions from income or capital gains are tax-free, making Roth 401(k)s more tax-efficient than taxable accounts.
- No Additional Income Adjustments: Unlike traditional IRAs or 401(k)s, Roth distributions do not trigger net investment income tax or Medicare premium surcharges.
- Rollover Flexibility: Workplace Roth 401(k)s can be rolled into Roth IRAs, useful for post-retirement Roth conversions.
Potential Drawbacks and Considerations
It is important to note that funds contributed to a Roth 401(k) may not qualify for employer matching contributions. Previously, employers were required to treat matches as pretax, disallowing matches for Roth 401(k)s. Secure 2.0 has relaxed these restrictions, but not all employers have updated their plans accordingly.
On balance, continuing catch-up contributions is advisable if possible, even without the upfront tax reduction. However, higher earners whose employer plans lack a Roth 401(k) option will be unable to make these catch-up contributions, highlighting the need to review plan specifics.
This analysis underscores the evolving landscape of retirement savings, driven by legislative changes like Secure 2.0, and emphasizes the importance of strategic planning for higher earners navigating new tax implications.
