Some retirement savers lose a key tax break under new IRS rule

The IRS is changing how Americans can make catch-up contributions to their workplace retirement accounts, which could have significant implications for retirement planning and budgeting.

A new rule took effect at the outset of 2026 that altered how high-income earners make catch-up contributions to their workplace 401(k) retirement plan, as those over the age of 50 whose earnings subject to payroll tax are $150,000 or more must make catch-up contributions to a Roth 401(k).

The change, which was required by the SECURE 2.0 Act of 2022, means that affected workers will miss out on the upfront tax deduction they were able to use previously when making catch-up contributions to traditional 401(k) accounts. The deduction reduced the worker's taxable income based on their contribution amount.

However, workers affected by the change will potentially benefit from the advantages that Roth accounts provide, such as tax-free earnings and withdrawals once the five-year aging rule for the plan has been satisfied.

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In 2026, workers can contribute up to $24,500 to their 401(k) plan – an increase from $23,500 last year.

Workers over the age of 50 are eligible for an additional catch-up contribution of $8,000 this year, up $500 from the 2025 threshold. Some plans allow enrollees in the 60 to 63 age range to make a larger catch-up contribution of $11,250.

The new rule change for catch-up contributions is permanent, and the income threshold is determined based on the prior year's W-2 form provided by the employer sponsoring the plan. 

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So if a worker earned $150,000 or more in the 2025 tax year, the adjustment would take effect for contributions made during the 2026 tax year.

Workers earning less than $150,000 are unaffected by the rule change and may continue to make catch-up contributions to their 401(k) – whether it's a traditional or Roth 401(k).

Fidelity notes that those saving for retirement who may be rethinking their strategy following the change could consider other ways to save for their retirement.

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Among those are contributing to a health savings account (HSA) if they're enrolled in an eligible health plan, as the tax-advantaged accounts let enrollees pay for medical expenses with pre-tax income and offer tax savings that can help with retirement goals.

Fidelity also suggests that savers could focus on maxing out their regular contributions to 401(k) plans, consider partial contributions to a Roth IRA or a traditional IRA, or convert traditional IRA funds to a Roth IRA. 

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The firm recommends that savers consult with a tax or financial professional about retirement savings goals to develop a plan.