Query: I am 52, make $210K a 12 months and heard I could lose a 401(okay) tax break in 2026. Ought to I nonetheless max out my 401(okay) as I had deliberate?
Reply: The extra money you are in a position to sock away in your 401(okay), the extra monetary flexibility you would possibly take pleasure in in retirement. And whether or not you are on monitor together with your financial savings or attempting to make up for misplaced time, chances are you’ll be desirous to make the most of your plan’s catch-up contributions, which can be found to savers ages 50 and over.
In the event you’re 52 years outdated and incomes $210,000 a 12 months, chances are you’ll be in a robust place to max out your 401(okay) on the catch-up degree. This 12 months, 52-year-olds (and anybody aged 50 and older) can contribute as much as $31,000 to a 401(okay), and that quantity is more likely to rise in 2026 in step with inflation.
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However there’s a brand new rule that can apply to 401(okay) catch-ups for greater earners, taking impact in 2026. And it’s a change that will go away you rethinking your plan to max out your contributions.
Greater earners lose a near-term tax break
For greater earners, conventional 401(okay) catch-ups are an effective way to not solely construct stronger nest eggs, but in addition seize extra tax financial savings up entrance. The foundations are altering in 2026.
As Jim Davis, CFP and Senior Wealth Advisor at Aspen Wealth Administration, explains, “Beginning in 2026, anybody incomes over $145,000 who desires to make 401(okay) catch-up contributions might want to put these further {dollars} right into a Roth account. Meaning paying taxes up entrance as an alternative of getting the speedy deduction.”
The $145,000 threshold applies to earnings earned within the earlier 12 months. So in case you have a $210,000 wage in 2025, it means you’ll be barred from making a pre-tax 401(okay) catch-up within the new 12 months.
It additionally signifies that if your organization’s 401(okay) plan doesn’t provide a Roth part, chances are you’ll be barred from making catch-up contributions. Nevertheless, this may occasionally solely be an issue for a small proportion of savers. As of 2023, 93% of 401(okay) plans had a Roth choice, in keeping with the Plan Sponsor Council of America.
There are nonetheless advantages to creating 401(okay) catch-ups
As a basic rule of thumb, Roth contributions make sense if you count on to be in a better tax bracket in retirement than you’re in as we speak. It’s because of this that greater earners usually choose out of a Roth and select to avoid wasting in conventional retirement plans as an alternative.
However simply because the foundations are altering with regard to catch-up contributions doesn’t imply greater earners ought to forgo them. As Davis factors out, with a Roth 401(okay), “the cash grows tax-free and withdrawals in retirement received’t be taxed.”
Brian Harrison, CFP and President at SAVVI Monetary, thinks greater earners ought to acknowledge the worth of attending to develop their cash tax-free.
“The facility of Roth contributions is one thing to contemplate, significantly as retirees live longer,” he insists. “That tax-free development a long time down the road could make a big effect.”
Sherman Standberry, CPA and Managing Associate at My CPA Coach, agrees.
“I proceed to tell high-earning shoppers that catch-up contributions are nonetheless a sensible technique,” he says. “Though this [change] leads to greater taxable earnings, the trade-off is the power to take pleasure in tax-free development and withdrawals throughout retirement. This could create priceless tax diversification throughout pre-tax and Roth accounts.”
Standberry additionally factors out that tax charges could improve sooner or later. Having a portion of financial savings in a Roth account helps shield towards that.
Davis, in the meantime, factors out that there could also be some much less apparent advantages to having cash in a Roth.
“You additionally want to contemplate different shifting elements in your plan,” he explains. “Greater earnings can have an effect on required minimal distributions, Social Safety, and Medicare premiums, particularly IRMAA.”
A change price embracing
The requirement for greater earners to make 401(okay) catch-ups as Roth contributions would possibly initially seem to be a penalty of types. However Davis says they will nonetheless be helpful to greater earners.
“The secret’s to view catch-ups as one piece of your total plan,” he says. “How do they match together with your tax technique, retirement earnings, and long-term money move?”
In fact, anybody who’s used to creating 401(okay) catch-ups on a pre-tax foundation ought to work with a monetary adviser or tax skilled to regulate to this modification. That might imply implementing different methods to keep away from a bigger tax invoice within the close to time period.
However that doesn’t imply greater earners ought to eschew 401(okay) catch-ups in 2026 or past. On the finish of the day, any cash that sits and grows in a 401(okay) — conventional or in any other case — will get particular tax remedy, and there’s an actual worth in that.
As Davis says, “When used thoughtfully, catch-ups may also help you save smarter — not simply extra — and maintain extra of what you’ve labored for as you progress towards retirement.”
