Next month, changes to 401(k) contribution limits will impact workers aged 50 and over, particularly high earners. These changes, part of the SECURE 2.0 Act of 2022, include increased tax-deferred 'catch-up' contribution limits, allowing older workers to boost their pre-tax savings. For instance, the standard 401(k) contribution limit will rise to $24,500 in 2026, up from $23,500 this year, adjusted for the cost of living. However, for those aged 50 and above, the 'catch-up' limit is set at $32,500 in 2026, an additional $8,000 beyond the standard limit. For those aged 60 to 63, the limit is even higher at $35,750, including a 'super catch-up' tax-deferred amount of $11,250. But here's the twist: high earners earning $150,000 or more will be required to shift their catch-up contributions into a Roth account, which means paying taxes upfront but allowing tax-free withdrawals during retirement. This is a significant change from traditional 401(k) plans, where contributions are taxed only upon withdrawal. Robert Canterbury, a senior wealth adviser, highlights a potential issue: many companies, especially smaller employers and nonprofits, may not offer Roth 401(k) plans alongside traditional deferred-tax plans. However, making the switch is relatively straightforward, and Canterbury advises employees to proactively discuss adding Roth options with their companies. Congress's motivation for these changes is to boost tax revenues by taxing high earners on their catch-up contributions. While plan administrators can make the necessary adjustments, payroll companies must also be informed to prevent employees from exceeding contribution limits. Guy Maddalone, CEO of GTM Payroll & HR, confirms that their firm is well-prepared for these changes, ensuring employees are notified when they reach their maximum deferral limit and automatically shifting contributions to Roth accounts when necessary.
