By: Mary F. Barnett, EA, Tax Manager
A recent change to federal retirement plan rules may affect older employees who make catch‑up contributions to their 401(k) plans, particularly those with higher incomes.
At the beginning of this year, individuals aged 50 and older who earned more than $150,000 in the prior year from their current employer are required to make any catch‑up contributions on a Roth basis rather than as traditional pre‑tax contributions.
Background on Catch-up Contributions
Catch‑up contributions are intended to help individuals increase retirement savings as they approach retirement age. For 2026, eligible workers may contribute an additional $8,000 beyond the standard 401(k) limit, while those ages 60 through 63 are permitted an even higher catch‑up amount.
Historically, these contributions could be made on a pre‑tax basis, providing an immediate reduction in taxable income. Under the new requirement, catch‑up contributions for affected individuals must be made with after‑tax dollars, which may result in higher current‑year taxable income and increased tax liability.
While Roth contributions do not offer an upfront tax deduction, they can provide long‑term advantages. Qualified withdrawals in retirement are tax‑free, and Roth 401(k) accounts are not subject to required minimum distributions. These features may offer greater flexibility in managing taxable income during retirement.
However, the shift to Roth contributions may also impact cash flow, adjusted gross income and eligibility for certain tax benefits – making advance planning especially important.
What Employees Need to Know
Employers are implementing this change in different ways. Some retirement plans automatically direct eligible catch‑up contributions to Roth accounts, while others require employees to affirmatively elect or consent to the change. In plans that require employee action, failure to respond may result in catch‑up contributions being suspended altogether.
Employees should review communications from their plan administrator and confirm how their plan is handling the new requirement.
Because this rule affects both retirement savings and overall tax planning, individuals who may be impacted should evaluate how the change fits into their broader financial strategy. Consulting with a tax professional like Osborne Rincon CPAs can help ensure contributions are structured appropriately and aligned with long‑term goals.
Mary Barnett joined Osborne Rincon in October 2007 and brings with her 14+ years of accounting experience. Mary puts her knowledge in landscape accounting, CNG fuel sales, and other areas to use in order to positively impact clients, helping them with achieving financial goals.