What to Know About Catch-Up Contributions

If you're a higher-income earner age 50 or older looking to make "catch-up" contributions to employer-sponsored retirement plans, the SECURE 2.0 Act of 2022 has a surprise in store for you. Beginning in 2026, those workers earning more than $145,000 in the prior year, will need to make any catch-up contributions after taxes to a designated Roth 401(k) account, which means you won't get a tax deduction. Here's what you need to know as you update your retirement savings plans between now and then.

As a reminder, employees who are 50 and older are allowed to contribute to their employer-sponsored retirement plan additional money, known as a catch-up contribution. For 2025, the catch-up contribution is an extra $7,500 on top of the $23,500 limit for everyone else, for a total limit of $31,000. And for those age 60 to 63, that catch-up contribution jumps from $7,500 to $11,250. Starting in 2026, though, savers over the age of 50 will be divided into two groups based on annual income:

1. Those making $145,000 or less in the prior year can continue making catch-up contributions to their regular pre-tax 401(k)s. 
2. Those making more than $145,000 in the prior year will have to put their catch-up dollars in a Roth 401(k)—which means those contributions will be after-tax, though their qualified withdrawals in retirement will be tax-free.

The change to catch-up contribution rules was initially supposed to take effect in 2024, which could've been a problem for those without access to a Roth 401(k). However, the IRS decided to grant a two-year reprieve, giving savers, employers, and retirement plan administrators more time to prepare. As a result, all plan participants 50 and older will be allowed to continue making catch-up contributions to their regular tax-deferred 401(k)s until 2026, regardless of income. 

Depending on your goals, this delay could be great news or a bit of a letdown. If your strategy is to make the most of your pre-tax savings, congratulations. You have one more year to do so.

For those who are interested in after-tax Roth 401(k) contributions, more employers than ever now offer these accounts, and any plan that wishes to continue supporting catch-up contributions will need to have a Roth 401(k) option in 2026. However, if your retirement plan does not currently offer a Roth 401(k) account, you still have several options.

Assuming your income is under the IRS income threshold, you could make contributions to a Roth IRA. For 2024 and 2025, the annual maximum IRA contribution is $8,000—which includes a $1,000 catch-up contribution—if you're 50 or older. Under the SECURE Act 2.0, future catch-up contribution amounts will be indexed to inflation.

If your income is too high to contribute to a Roth IRA, you could consider a backdoor Roth conversion. You'll need to have a traditional IRA and a Roth IRA to make this work. First, you make after-tax contributions up to the annual maximum to a traditional IRA (make sure to file IRS Form 8606 every year you do this). Then, transfer the assets from the traditional IRA to the Roth IRA. You can make this transfer and conversion at any point in the future.

The conversion triggers income tax on any appreciation of the after-tax contributions—but once in the Roth IRA, earnings compound tax-free. Earnings distributed from the Roth IRA are also tax-free, as long as you're 59½ or older and have held the Roth for at least five years. (Note that each conversion amount is subject to its own five-year holding period as it relates to tax-free withdrawals.)

If you have no other IRAs, figuring out the tax due will be simple. However, it can be more complicated if you have multiple IRAs. The IRS' pro-rata rule requires you to include all your traditional IRA assets—that means your IRAs funded with pre-tax (deductible) contributions as well as those funded with after-tax (nondeductible) contributions—when figuring the conversion's taxes. Then, you pay a proportional amount of taxes on the original account's pre-tax contributions and earnings.

Let's look at an example. Say you contribute $6,000 to a nondeductible traditional IRA. You also have a rollover IRA worth $94,000 from a previous 401(k) made with pre-tax contributions. In this case, 94% of any conversion would be taxable. Here's the math:

Although this strategy has existed for many years, the IRS hasn't weighed in on it definitively, so it's highly recommended that you work with a tax advisor.

You may be tempted to overlook your taxable brokerage account, but don't let the name fool you: Taxable accounts can be pretty tax-efficient if you're careful. There's no up-front tax break, and income is taxed in the year you recognize it. But if you hold assets for more than a year, your gains may qualify for a long-term capital gains tax rate that is lower than your regular income tax rate. Qualified dividends can also benefit from the lower capital gains tax rates. Tax-efficient investments (like certain municipal bonds) may also offer tax benefits. In addition, losses may be deductible and can be used to reduce your taxable income through a process known as tax-loss harvesting. And unlike with some tax-advantaged accounts, the IRS won't restrict contributions, withdrawals, or when you can spend the money.