IRS Alters Retirement Savings Rules for High-Earning Workers Over 50

What's Happening?

The IRS has announced changes to retirement savings rules for workers aged 50 and older who earn over $145,000 annually. Starting January 1, 2026, these individuals will be required to make 'catch-up' contributions to their 401(k) or similar retirement plans using Roth (after-tax) dollars. This change affects various retirement plans, including 401(k), 403(b), Government 457(b), SIMPLE 401(k), SIMPLE IRA, and SARSEPs. The adjustment is part of the SECURE 2.0 Act, aiming to provide tax clarity and future tax-free growth for workers, while also posing challenges for employers in terms of plan updates and compliance.

Why It's Important?

The shift to Roth contributions for catch-up savings impacts high-earning workers by altering their retirement savings strategy. While Roth contributions offer tax-free growth, they require taxes to be paid upfront, potentially affecting take-home pay. Employers face the challenge of updating retirement plans to accommodate these changes, which may involve system upgrades and increased administrative work. The new rules emphasize the importance of tax planning and compliance for both employees and employers, highlighting the need for strategic adjustments in retirement savings approaches.

What's Next?

Employers must prepare for the transition by updating plan documents and systems to support Roth contributions. They will need to track employee income from the previous year and offer options for opting out of catch-up contributions. The IRS has provided a grace period for compliance through 2026, with full adherence expected by January 1, 2027. Workers and employers should anticipate further guidance from the IRS to ensure smooth implementation of the new rules. This change underscores the importance of proactive planning and communication to minimize disruptions and optimize retirement savings strategies.