Last Monday, on September 15, the Internal Revenue Service (IRS) of the United States announced a final ruling stating that starting in 2026, workers aged 50 and above with annual incomes exceeding $145,000 would no longer enjoy pre-tax benefits for “catch-up contributions” in their 401(k) retirement plans. Instead, they must deposit these contributions into their Roth accounts after taxes.
This change implies that many workers, during high-income years, will be paying taxes in advance for their catch-up contributions, rather than paying taxes during retirement in lower-income years. The money will be deposited into their Roth accounts for tax-free withdrawals in the future.
According to the regulations, when using a traditional 401(k) retirement account, you do not need to pay taxes on contributions (in other words, contributions are made with pre-tax funds), but all funds will be taxed upon withdrawal. When using a Roth individual retirement account, you need to pay taxes on contributions before making them (contributions are made with after-tax funds), but withdrawals are tax-free. In both types of individual retirement accounts, any earnings kept within the accounts will not be taxed.
This is the first time that the U.S. tax laws have mandated Roth savings, allowing the government to receive this portion of pre-paid taxes in advance, rather than taxing individuals when they withdraw funds during retirement.
As per the regulations, high-income individuals meeting the criteria will no longer be able to use pre-tax catch-up contributions during high-income years to reduce current income taxes.
For example, a 60-year-old worker with a 35% tax rate may lose nearly $4,000 in deductions if they contribute $11,250 to their retirement savings, potentially increasing their adjusted gross income and causing them to lose out on other tax benefits, such as deductions for student loan interest or state and local taxes.
If a company’s 401(k) retirement plan does not offer a Roth option, high-income employees will not be able to make catch-up contributions. As a result, many employers are swiftly introducing Roth options, with 95% of Fidelity-managed 401(k) plans now offering Roth options, up from 73% two years ago, and 86% of Vanguard-managed 401(k) plans offering Roth options.
Experts state that while the mandatory requirement for Roth retirement accounts may seem stringent, it could be beneficial for some savers.
Joseph Perry, a registered accountant with CBIZ Advisors in New York, said, “Although they are now taxed on the money contributed to Roth retirement accounts, they will have a tax-free source of retirement income in the future.”
He suggested that high-income individuals take this opportunity to reassess asset allocation, considering diversifying savings across pre-tax accounts, Roth retirement accounts, and non-retirement brokerage accounts. In brokerage accounts, interest income, dividends, and capital gains should be taxed.
He mentioned that many high-income earners have an oversupply of funds in pre-tax accounts and are now trying to save more in Roth accounts.
“Perhaps not only the catch-up contributions should be deposited into Roth retirement accounts, but your entire 401(k) account should be stored in a Roth retirement account,” he said.