A new tax split now applies to older, higher-paid participants making extra contributions to many workplace retirement plans. In 2026, someone whose prior-year wages from the plan sponsor exceeded $150,000 must generally put age-50 catch-up contributions into a Roth account. Those dollars are taxed before entering the plan, while ordinary salary deferrals can still go into a traditional pretax account if the plan permits.
The $150,000 test looks backward one year
The rule does not use current salary or household income. For a 2026 catch-up contribution, the plan looks at 2025 wages subject to Social Security tax from the employer sponsoring the plan. A participant over the threshold is treated as a Roth catch-up participant for 2026. Investment income, a spouse’s pay and compensation from an unrelated employer do not simply fold into that sponsor-specific wage figure.
IRS catch-up contribution guidance, reviewed in May 2026, states the operational rule directly: participants in plans with Roth features must make catch-up contributions on a Roth basis when prior-year wages with the sponsor exceeded $150,000. The threshold is indexed, so the figure relevant to a later year may differ. For 2026, $150,000 is the number plans use.
Only catch-up dollars are forced into Roth treatment. The regular 2026 elective-deferral limit is $24,500, and the general age-50 catch-up limit is another $8,000. A high earner can still direct the first $24,500 to a traditional 401(k), subject to plan choices, then send the catch-up portion to Roth. That division preserves some present-year deduction while changing the tax treatment of the extra savings.
Free retirement updates: One number can cost or save hundreds a month in retirement. The free Retirement Shield newsletter surfaces the ones worth knowing. Sign up free.
After-tax contributions change today’s paycheck
A pretax contribution reduces taxable income for the year it is made. A Roth contribution does not, so shifting an $8,000 catch-up from traditional to Roth can increase current federal and state taxable income by the same contribution amount. The eventual benefit is qualified tax-free Roth withdrawals, provided the account meets the applicable age and holding-period rules.
Treasury and IRS final-regulation materials explain that the statutory Roth catch-up requirement followed a transition period ending December 31, 2025. The detailed final regulations generally apply later, while plans operating in 2026 implement the statute under the transition guidance and reasonable good-faith rules. Current IRS participant guidance nevertheless identifies 2026 as the first year of mandatory Roth treatment for affected catch-ups.
The rule can create an administrative problem for a plan that offers catch-up contributions but lacks a Roth feature. SECURE 2.0 was written to prevent higher earners from making pretax catch-ups, not to guarantee that every employer adds a Roth account. Employers have therefore had to amend plan systems and payroll elections. A participant near the threshold needs to know whether the plan can accept the required contribution before assuming the extra deferral will occur automatically.
The wage definition can also produce results that look counterintuitive. A partner or self-employed owner may have substantial business income but no FICA wages from the plan sponsor, while an employee can cross the threshold with wages even if deductions reduce taxable income below $150,000. The rule was written around prior-year Social Security wages, not adjusted gross income or the amount shown as salary in an offer letter. Changes between related employers and certain common-control arrangements add administrative detail, which is one reason the final regulations include aggregation rules. For a participant, the practical source is the prior-year wage record the plan administrator uses, not a household tax bracket estimate.
The retirement tradeoff is tax timing, not lost savings
Mandatory Roth treatment does not lower the contribution limit. It moves the tax bill from retirement to the earning year. For a worker in a high bracket now, that can be expensive because the deduction disappears when income is elevated. For a household expecting high future taxable income, the Roth balance can diversify withdrawals and reduce reliance on accounts that create ordinary income. Roth 401(k) balances also avoid lifetime required minimum distributions for the original owner under current law.
The IRS’s original transition notice established that relief ended after 2025, giving payroll systems time to prepare. That history matters because older articles often describe the Roth rule as delayed and may imply it is still optional. The delay has run out for 2026 catch-ups under current participant guidance, even though some technical provisions in the later regulations have separate applicability dates.
The key planning move is to separate three decisions that payroll screens may present together: the regular deferral amount, the catch-up amount and the tax character of each. High earners can still save the extra dollars, but the 2026 catch-up must land on the Roth side. Payroll withholding may need adjustment because the same gross deferral now shelters less current income, and a year-end contribution surge can expose the tax effect late. A worker changing jobs should also confirm which employer’s prior-year wages control each plan rather than assuming one universal household test. The rule does not eliminate retirement capacity; it makes the present tax cost of using that capacity visible in the paycheck.
This article was produced with AI assistance and reviewed by The Money Overview editorial team.
More Financial Reading
