Significant changes are on the horizon for high earners as the IRS adjusts rules for 401(k) contributions. Starting in 2027, but potentially as early as next year for some plans, workers aged 50 and older who earned over $145,000 in the previous year will face new restrictions on catch-up contributions.
New 401(k) Contribution Rules for High Earners Over 50
Under the upcoming regulations, those making more than $145,000 will only be permitted to make catch-up contributions using after-tax (Roth) dollars. Previously, all participants, as long as their workplace plans allowed, could choose between Roth and pretax contributions.
Key Details of the Changes
- Affected individuals: Workers aged 50 and above.
- Threshold income: $145,000 from the previous year.
- Contribution types: All catch-up contributions must use Roth arrangements for high earners.
- Potential limitation: Workers without access to a Roth account may be excluded from making catch-up contributions altogether.
Understanding Catch-Up Contributions
Catch-up contributions provide older workers the opportunity to save more for retirement. In 2025, the basic 401(k) contribution limit stands at $23,500, with an additional $7,500 available for catch-up contributions. For those between the ages of 60 and 63, a temporary “super” catch-up option allows contributions of $11,250.
Implications of the 401(k) Changes
The shift to mandatory Roth contributions for high earners signifies a notable tax strategy adjustment. While traditional pretax contributions lower taxable income, Roth contributions do not affect current taxes but allow tax-free growth and withdrawals in retirement. This paradigm shift poses both challenges and opportunities.
Benefits of Roth Contributions
- Diversification of tax strategy for retirement.
- Tax-free withdrawals in retirement could mitigate increases in future tax rates.
According to a 2024 survey by the Plan Sponsor Council of America, approximately 93% of workplace plans offer a Roth 401(k) option. Unfortunately, high earners employed at companies without a Roth account may find themselves lacking options for catch-up contributions.
Actionable Steps for High Earners
For those impacted by these changes, several strategies can help optimize retirement savings:
- Leverage the final two income years to maximize pretax catch-up contributions.
- Consult with your plan administrator to clarify when the new regulations will be enacted.
- Consider the opportunity that Roth catch-ups present for diversifying retirement savings.
- Work with a financial planner to model different contribution strategies.
This rule change may require a substantial adjustment in retirement planning for high earners. Staying informed and proactive will be crucial in navigating this important shift in 401(k) contribution rules.
