IRS final rules shift 401(k) catch-up contributions to Roth for high earners

The Internal Revenue Service has finalized rules that will shift catch-up contributions for 401(k) plans from pre-tax funding to after-tax funding in Roth-style accounts for workers earning high wages, with the change taking effect for the 2026 plan year. The rules apply to people aged 50 and older who can contribute an extra $7,500 beyond the standard $23,500 annual limit, but the additional amount must be deposited into a Roth 401(k) account after taxes. The final rules, issued this month, represent the first time the federal government has required certain workers to use Roth-style retirement accounts for catch-up contributions, a move that could alter the timing of tax payments for a sizable segment of the workforce.

The regulation sets a $145,000 wage threshold that determines who must follow the new rule, and it applies separately to each employer. That means the limit is evaluated per job rather than as a single combined income from multiple employers. If you work two jobs and earn under the limit at one or both, you can still make pre-tax catch-up contributions at those employers, provided each job’s wages meet the threshold rules. Self-employed workers and those without regular wages are not subject to the new constraint and can continue making pre-tax catch-up contributions. Not all 401(k) plans offer a Roth option, but many employers are racing to add it in response to worker interest and the new requirements.

For workers who fall into the 60-to-63 age band, catch-up contributions rise to $11,500. That higher amount will also be deposited into a Roth account under the new rules. The change is significant because it shifts the tax burden, at least for the catch-up portion, from being paid in retirement to being paid upfront in years when income may be higher. For example, a 60-year-old in the 35 percent tax bracket could lose nearly $4,000 in upfront tax advantages on an $11,250 catch-up contribution, the Wall Street Journal reported, illustrating how the tax timing can affect the overall value of the catch-up.

Tax implications extend beyond the immediate deduction. While Roth accounts grow tax-free and withdrawals in retirement are generally tax-free, the upfront tax hit can influence an individual’s current-year income and could push some taxpayers into higher tax brackets or reduce eligibility for other deductions and credits. Those who expect to be in a higher tax bracket in retirement may view Roth-style catch-ups as beneficial in the long run, but evaluating the trade-offs will require careful planning, especially for those juggling multiple jobs or variable income. In cases where an employer does not offer a Roth 401(k) option, workers will not be able to redirect catch-up contributions into a Roth account, potentially limiting options for those who would otherwise prefer a post-tax path for their catch-ups.

Not all employers currently offer Roth options, but adoption is broadening. Fidelity reports that about 95 percent of 401(k) plans now include a Roth option, up from roughly 73 percent two years ago. Vanguard notes Roth availability in about 86 percent of its plans. Experts say the shift could push more employers to provide Roth features as workers become more aware of the option and the implications of the new rules. Ian Berger, an analyst with Ed Slott & Co., told the Journal that as high-earning workers realize they can’t contribute more on a pre-tax basis, employers will likely respond by expanding Roth features to preserve or grow overall saving rates. The rule change underscores a broader trend toward tax diversification in retirement planning, as savers weigh when to pay taxes on retirement income and how different account types can help manage future tax exposure.