The Internal Revenue Service (IRS) has finalized a rule requiring high-income earners to make their 401(k) catch-up contributions to post-tax Roth accounts, a change set to take effect in 2026. This new regulation, originating from the 2022 Secure Act, will significantly alter how older, high-earning workers save for retirement.
The rule specifically targets individuals earning over $145,000 annually. Alongside this change, a new "super catch-up" provision will allow those aged 60 to 63 to contribute even more, further impacting their tax and retirement strategies.
Key Takeaways
- Starting in 2026, individuals earning over $145,000 must make 401(k) catch-up contributions to a Roth account.
- This means contributions will be made with post-tax dollars but will grow and can be withdrawn tax-free in retirement.
- A new "super catch-up" provision for savers aged 60-63 will also be subject to this Roth requirement for high earners.
- The change is intended to increase immediate tax revenue for the government by eliminating the upfront tax deduction for these specific contributions.
- Financial experts are divided on whether this will encourage Roth savings or deter high earners from making catch-up contributions altogether.
Understanding the New Retirement Savings Rules
The upcoming changes to retirement savings plans stem from the Secure 2.0 Act of 2022. After an initial delay, the IRS issued guidance confirming the new rules will be implemented starting in 2026 for contributions made in 2027 and beyond. This gives employers and employees time to prepare for the transition.
The central change is the mandatory use of Roth accounts for 401(k) catch-up contributions by high earners. Previously, these savers could choose between traditional pre-tax contributions, which lower their current taxable income, or Roth post-tax contributions.
Under the new system, the choice is removed for those above the income threshold. Their catch-up funds will be taxed in the year they are earned, a significant shift designed to accelerate federal tax collection.
The Introduction of the "Super Catch-Up"
Another key development is the "super catch-up" contribution. This provision is designed for workers approaching retirement, specifically those between the ages of 60 and 63. It allows them to contribute 150% of the standard catch-up amount.
For context, in 2025, the regular employee contribution limit is set at $23,500, with a standard catch-up of $7,500 for those 50 and older. Based on these figures, the super catch-up amount for 2026 could be approximately $11,250. For a high earner, this entire amount would have to be directed into a Roth 401(k).
Immediate Tax Impact
A worker in the 35% federal tax bracket who makes a full super catch-up contribution of $11,250 would face an immediate tax liability of nearly $4,000 on that amount. This is money that would have previously been tax-deferred.
The Financial Trade-Off for Savers
The government's motivation for this change is clear: increase current tax revenue. By requiring high earners to pay taxes on their catch-up contributions now, it boosts federal income without raising overall tax rates. However, the decision presents a complex choice for individual savers.
The primary benefit of a Roth contribution is its tax treatment in retirement. The money grows tax-free, and qualified withdrawals after age 59½ are also tax-free. This can be highly advantageous for retirees who expect to be in a high tax bracket or believe tax rates will rise in the future.
"It used to be that if I’m in the 35% now, I could assume that when I retired I’d be in the 12% bracket, but nobody feels that way anymore," said Ed Murphy, CEO of Empower. "Now people might think, if I’m in the 35% bracket now, it could be 50% in retirement."
Additionally, Roth 401(k)s, once rolled over to a Roth IRA, are not subject to Required Minimum Distributions (RMDs). This allows wealth to grow for longer and provides more flexibility. Funds can also be passed to heirs tax-free, although beneficiaries are typically required to withdraw the full balance within 10 years.
Potential Impact on Savings Behavior
While the long-term tax benefits of Roth accounts are compelling, the loss of an immediate tax deduction could alter savings habits. The upfront tax break offered by traditional 401(k)s is a powerful incentive for many people to save.
According to research from Empower, which serves a large base of retirement savers, removing the pre-tax advantage could negatively affect savings rates. Murphy noted that in focus groups, participants consistently said that such a change would reduce their willingness to save.
Who Makes Catch-Up Contributions?
Data from Vanguard's "How America Saves" report shows that catch-up contributions are made by a relatively small group of savers. In 2024, only 14% of plan participants reached the maximum 401(k) contribution limit. Among those eligible by age, just 16% made any catch-up contributions. This group overwhelmingly consists of high-income workers, many of whom already utilize Roth features.
Some high earners might decide the immediate tax cost is too high. Instead of contributing to a Roth 401(k), they could choose to invest the post-tax money in a standard brokerage account. While this offers more liquidity, it lacks the tax-free growth and withdrawal benefits of a Roth account.
Is the Roth Catch-Up Still a Good Deal?
For high earners who can afford the upfront tax payment, the new rule may simply formalize a strategy they were already considering. The ability to secure a source of tax-free income in retirement is a valuable tool for managing future tax liabilities, especially with uncertainty around future tax rates.
The decision depends on an individual's financial situation and their outlook on future taxes. Key factors to consider include:
- Current vs. Expected Future Tax Bracket: If you expect to be in the same or a higher tax bracket in retirement, paying taxes now through a Roth contribution is often beneficial.
- Need for Tax Diversification: Having a mix of pre-tax (traditional 401(k)) and post-tax (Roth) retirement accounts provides flexibility to manage taxable income in retirement.
- Estate Planning Goals: The tax-free inheritance feature of Roth accounts can be a significant advantage for those planning to pass wealth to the next generation.
The new rule primarily affects a small but financially significant segment of the population. According to Empower's Ed Murphy, achieving widespread adoption of catch-up contributions remains a challenge, as many workers prioritize near-term financial needs like mortgages and tuition over increasing retirement savings.
Ultimately, the mandatory Roth catch-up for high earners forces a strategic decision. While it removes the immediate tax break, it offers powerful long-term benefits that align with modern retirement planning, where managing future tax bills has become as important as accumulating savings.
