If you’re 50 years old or older and diligently boosting your retirement savings with 401(k) catch-up contributions, there’s an important change on the horizon you can’t afford to miss. The Secure Act 2.0, a sweeping piece of retirement legislation, has rewritten the rules, and starting in 2026 it has changed how you make catch-up contributions based on your income.
This isn’t just a small tweak to the tax code; it’s a shift that could impact your take-home pay, your retirement tax strategy, and how business owners structure their company’s retirement plans.
Let’s unpack what’s changing, why it matters, and what steps you should take now to prepare.
The Catch-Up Rule: What’s Changing
Under current rules, if you’re age 50 years old or older, you can make additional “catch-up” contributions to your 401(k) on top of the annual limit. These contributions have traditionally been allowed on a pre-tax basis, helping reduce your taxable income today while saving more for the future. Starting January 1, 2026, the Secure Act 2.0 divides participants into two categories based on income:
- Earning less than $145,000 (in the prior year): These individuals may continue to make catch-up contributions on a pre-tax basis, just like before.
- Earning more than $145,000 (in the prior year): Catch up contributions made by individuals in this category will be required to be made into a Roth 401(k) (vs. a traditional 401(K)), meaning after-tax dollars.
This $145,000 threshold is based on your prior-year’s wages from the employer sponsoring your plan. In other words, your 2025 earnings determine your 2026 catch up contribution treatment.
What This Means for Employees
If you’re a high earner, making more than $145,000, you’ll need to prepare for a shift in how your contributions are taxed.
While the Roth 401(k) doesn’t reduce your taxable income now, the tradeoff is that your qualified withdrawals in retirement will be tax-free. For many, that’s a powerful long-term benefit, but it also means a slightly smaller paycheck in the short term.
This change also reinforces the importance of tax diversification in retirement. Having a mix of pre-tax and Roth assets can give you more flexibility when drawing income later in life.
What Business Owners Need to Know
If you’re a business owner sponsoring a 401(k) plan, this change affects you in two key ways:
- As a participant: If your compensation exceeds $145,000, your own catch-up contribution must now be Roth-based. That means higher taxable income in the present, but tax-free withdrawals down the road.
- As a plan sponsor: Your business’ plan must offer a Roth option for employees. If your 401(k) doesn’t currently allow Roth contributions, you’ll need to amend your plan by 2026 to stay compliant. Failing to do so could prevent participants from making any catch-up contributions at all.
This is a crucial administrative and compliance consideration, one worth reviewing now with your plan provider or third-party administrator (TPA) to avoid last-minute headaches.
How to Prepare Now
- Confirm your expected 2025 income level. Review your expected 2025 compensation to determine which category you’ll fall into for 2026.
- Check if your employer’s 401(k) offers a Roth option. If not, raise the issue with the Human Resource department or your plan administrator soon.
- Revisit your tax strategy. You may want to coordinate with your CPA or financial planner to manage the tax impact of Roth contributions.
- Think long-term. Roth contributions can be powerful tools for reducing taxable income in retirement and creating more flexibility with withdrawals.
Final Thoughts
The Secure Act 2.0 has brought plenty of changes aimed at modernizing retirement savings, but the new catch-up contribution rule is one of the most impactful for higher earners.
Whether you’re an employee preparing for this shift or a business owner ensuring your plan remains compliant, now is the time to plan. Don’t wait until 2026 to find out your paycheck or plan isn’t set up correctly. Start the conversation with your financial advisor or plan administrator today—and if you have questions or want guidance on how these changes affect your specific situation, contact our team to schedule a consultation and ensure your retirement strategy stays on track.
Source: https://www.schwab.com/learn/story/what-to-know-about-catch-up-contributions
APPENDIX:
Contribution Limits for 2025 (for context)
- Base contribution limit: $23,500
- Catch-up contribution (age 50+): Additional $7,500
- Total = $31,000
- Enhanced catch-up (ages 60–63): Additional $11,250
- Total = $34,750
- After age 64: Reverts to the standard $7,500 catch-up
- Total = $31,000 total
Contribution Limits for 2026
- Base contribution limit: $24,500
- Catch-up contribution (age 50+): Additional $8,000
- Total= $32,500
- Enhanced catch-up (ages 60-63): Additional $11,250
- Total= $35,750
Disclosure:
Green Ridge Wealth Planning, LLC is a registered investment adviser. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment/tax advice. The investment/tax strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment/tax strategy for his or her own particular situation before making any investment decision(s). You are responsible for consulting your own investment and/or tax advisor as to the consequences associated with any investment.
The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Any opinions, projections, or forward-looking statements expressed herein are solely those of the AUTHOR, may differ from the views or opinions expressed by other areas of Green Ridge Wealth Planning, LLC, and are only for general informational purposes as of the date indicated.