Nearly 93% of employers currently offer a Roth 401(k) plan, according to the Plan Sponsor Council of America. However, the remaining 7% may not provide this option, so employees should inquire with their employers regarding the availability of a Roth 401(k) account.
This change, effective in 2026, will particularly affect middle-aged workers, especially those earning over $100,000 a year, of which around one in five individuals between 45 and 54 fall into this category. The key difference between a standard 401(k) and a Roth 401(k) lies in their tax treatment. With a traditional 401(k), employees contribute pre-tax income, reducing their taxable income for the year. In contrast, Roth 401(k) contributions are made with after-tax income, meaning no immediate tax deduction is available.
Starting in 2026, new income tests will come into play for workers making catch-up contributions. Specifically, individuals who earned over $145,000 from their employer in the previous year will only be permitted to make catch-up contributions to a Roth 401(k). Historically, employees could contribute catch-up funds to either type of 401(k).
As it stands, in 2025, eligible workers can contribute up to $23,500 to their 401(k) plans. Individuals over the age of 50 can make additional catch-up contributions to bolster their retirement savings. It’s also worth noting that the $145,000 income test applies separately to each employer, meaning if a worker has recently changed jobs, only income from the current employer counts towards this threshold.
While the IRS has introduced complexity into the catch-up contributions process that high earners must now navigate, this could serve as a wake-up call for those in middle to high-income brackets to consult with financial advisors. Navigating these new regulations effectively may require expertise, especially as the changes introduce distinct considerations for tax planning and retirement strategies.
For high earners, seeking advice from financial planners or tax professionals who specialize in retirement savings can provide crucial insights. In addition, options such as exploring tax benefits through commercial real estate investment also present opportunities for diversification and potential tax savings.
As we approach these regulatory changes, the importance of engaging with knowledgeable financial experts cannot be overstated, especially for individuals looking to maximize their retirement savings while managing their tax burdens effectively.