If you’re age 50 or older and participating in a 401(k) plan, catch-up contributions have long been a powerful way to accelerate retirement savings. Beginning in 2026, however, an important rule change will affect how some of those dollars must be contributed—specifically for higher earners.
Here’s what’s changing, why it’s happening, and what it means for your retirement strategy.
The 2026 Rule Change at a Glance
Starting in 2026, if you earn more than $150,000 in FICA wages (as reported in W-2 Box 3) in 2025 with the employer sponsoring your 401(k) plan, any catch-up contributions must be made as Roth contributions.
Previously, this income threshold was $145,000. The IRS increased it to $150,000 to reflect cost-of-living adjustments, and the threshold will continue to be indexed in future years.
This rule applies only to catch-up contributions, not to standard elective deferrals or employer contributions.
Why Is This Change Happening?
This update stems from SECURE Act 2.0, legislation designed to expand access to retirement plans and encourage higher savings rates. While many of its provisions benefit workers, the Roth catch-up requirement for higher earners serves a different purpose.
Traditional (pre-tax) catch-up contributions reduce taxable income today and defer taxes until retirement. Roth contributions, on the other hand, are taxed upfront but grow tax-free over time.
For higher earners still in their peak earning years, Congress determined that Roth catch-up contributions strike a better balance—supporting retirement readiness while ensuring taxes are paid earlier rather than decades later.
Why the $150,000 Test Uses FICA Wages
The income test is based on W-2 Box 3 (Social Security wages) rather than adjusted gross income (AGI). This approach:
- Is employer-verifiable
- Avoids complexity from deductions or tax planning strategies
- Simplifies plan administration
If your Box 3 wages exceed $150,000 with the same employer sponsoring the plan, the Roth requirement applies.
What If Pre-Tax Catch-Up Contributions Are Made by Mistake?
If pre-tax catch-up contributions are made when Roth contributions were required, the IRS allows correction through an in-plan Roth conversion.
This process:
- Converts pre-tax dollars to Roth within the plan
- Triggers income tax in the year of conversion
- Helps preserve compliance and avoid penalties
While this creates a taxable event, it also results in Roth assets that can provide long-term flexibility and tax-free income in retirement.
What This Means for Your Retirement Strategy
Although paying taxes upfront may feel uncomfortable, Roth catch-up contributions can offer meaningful advantages:
- Tax-free income in retirement
- Reduced required minimum distributions (RMDs)
- Greater control over future tax brackets
- More efficient wealth transfer to heirs
For many higher earners, this rule encourages greater tax diversification—a valuable tool in long-term financial planning.
Need Help Navigating Roth Catch-Up Contributions?
Understanding how this rule applies to your specific situation—and correcting contributions if needed—can feel complex. Our benefits team is here to help.
For assistance with Roth catch-up contributions or in-plan Roth conversions, contact: benefits@eESIpeo.com
