What's Happening?
Starting in 2026, Americans aged 50 and older earning over $145,000 will be required to make their 401(k) catch-up contributions to a Roth account. This change, part of Secure Act 2.0, means these workers will pay taxes on their contributions upfront, but withdrawals in retirement will be tax-free. If an employer does not offer a Roth 401(k) option, these employees will not be able to make catch-up contributions.
Why It's Important?
This new rule could significantly impact retirement planning for high-earning older workers. While paying taxes upfront may be seen as a disadvantage, the potential for tax-free withdrawals in retirement could be beneficial, especially if tax rates rise. The change may prompt workers to reassess their retirement strategies and consider the long-term benefits of Roth accounts. Employers may also need to adjust their retirement plan offerings to accommodate this new requirement.
What's Next?
As the implementation date approaches, financial advisors and employers will need to educate affected employees about the implications of the new rule. Companies may consider adding Roth 401(k) options to their retirement plans to ensure employees can continue making catch-up contributions. The rule may also lead to broader discussions about retirement savings strategies and the role of tax policy in retirement planning.
