High earners 50-plus to lose valuable 401(k) tax break as contribution rules set to change — how it will affect savings

New rules from the IRS will take away a popular retirement tax break from some of the workforce’s higher earners.

Starting in 2027 — although some plans could implement the change by next year — workers aged 50 and up who earn more than $145,000 in the previous year will only be able to make catch-up contributions to their 401(k) and other workplace plans with after-tax (Roth), not pretax, dollars.

Until now, all workers have been able to choose between making Roth and pretax contributions, assuming their workplace plans allowed for either one. But that choice is being taken away for catch-up contributions by high earners. It’s also being widely reported that workers in this category who don’t have access to a workplace Roth account may no longer be allowed to make catch-up contributions at all as a result of the new rules.

Here’s what you need to know about this rule change and how it could impact your retirement plans.

Catch-up contributions allow people aged 50 and up to contribute more to their workplace retirement accounts. For 2025, the standard 401(k) contribution limit is $23,500, with an extra $7,500 allowed as a catch-up. Workers aged 60-63 qualify for a temporary “super” catch-up of $11,250.

Here’s what the new rules will mean for you:

• If you made less than $145,000 in the previous year, you can still decide between pretax and Roth contributions.

• If you made more than $145,000 in the previous year, all catch-up contributions must go into the Roth bucket.

For high earners, this means losing a key tax deduction. Pretax contributions lower your taxable income in the year you make them, which can be especially valuable if you’re in a high tax bracket. Roth contributions, on the other hand, don’t reduce your current taxes, but investments grow tax-free and withdrawals in retirement aren’t taxed.

Despite the drawbacks to this change (namely, losing out on a tax deduction), there are a few benefits:

• Roth contributions can help diversify your tax strategy in retirement. You’ll have a mix of taxable and tax-free accounts to pull from.

• Tax-free withdrawals could be a big advantage if tax rates rise in the future.

According to CNN, citing a 2024 survey by the Plan Sponsor Council of America, a vast majority (93%) of workplace plans offer a Roth 401(k) option. (1) High-earning employees whose workplaces don’t offer a Roth account may be out of luck when it comes to catch-up contributions, experts say.

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If you’re subject to these changes because of your age and salary, it may require a shift in how you approach retirement savings. Here are some practical steps to consider:

You still have up to two income years to take advantage of pretax catch-ups. If you’re in a high tax bracket, making those contributions now could maximize your current-year tax savings before the door closes. Confirm with your plan administrator when they will begin applying the new ruleset.

If most of your retirement savings are pretax, this change can actually be an opportunity. Roth catch-ups diversify your savings, giving you more flexibility in retirement. For example, if you need to minimize taxable income in a future year, you could tap Roth accounts instead of traditional ones.

A financial planner can help you test different scenarios — for example, accelerating pretax contributions in 2025-2026, then shifting to Roth in 2027 — to determine which strategy has the best outcomes. Modeling can highlight whether you’re better off smoothing your tax burden over time or embracing tax-free growth sooner.

For higher-earners this rule change might require a large shift in your retirement planning strategy. It’s important to stay informed and start thinking ahead now.

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CNN (1)

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.