New 401(k) Rule Affecting 'Catch-Up' Contributions

A new rule to 401k contributions will affect high earners who make ‘catch-up contributions’ in their 401ks or other tax-deferred workplace plans.

It essentially eliminates the tax break for these contributions, like the one you get for normal contributions to a 401k, 403b, or other employee plans.

Current Situation

Currently if you are over 50 years old and you are contributing the maximum amount to your 401k, which is $23,500 for 2025, then you can make additional contributions to ‘catch-up’ if you wish to. The limit for these catch up contributions is $7,500 for 2025, and $11,250 for people between 60 and 63 if their employer allows it. All tax numbers are adjusted for inflation annually.

All these contributions could be made tax deferred, meaning the amount would get taken out of your paycheck before tax, lowering your tax bill today.

Starting in 2026

Starting next year, in 2026, if you are over 50 years old and made more than $145,000 in FICA wages (Federal Insurance Contributions Act), the income subject to Social Security and Medicare Taxes, then any catch-up contributions will be subject to income tax. That means while regular 401k contributions will still be tax-free, these extra contributions will not.

Once invested, your after-tax extra contributions will be able to grow tax free and be withdrawn tax free, under the appropriate conditions.

93% of workplace retirement plans offer employees the option to create a Roth 401k. If your plan doesn’t, the rule change will mean you are no longer permitted to make catch-up contributions.

In addition, those with FICA income under $145,00 and making catch-up contributions will not be affected.

Selah Portfolios & Planning

and LPL Financial do not provide legal advice or tax services.  Please consult your legal advisor or tax advisor regarding your specific situation.