Last year, the IRS finalized rules outlined in the SECURE 2.0 Act that change the way some employees can make follow-on contributions to their employer retirement plans such as 401(k)s. While many programs are preparing for the change, programs should be fully compliant by Jan. 1, 2027.
Now is a good time to revisit your retirement strategy and assess how your contribution strategy will change. Here’s what you need to know about the new law.
What is changing in 2027?
Catch-up contributions allow anyone age 50 or older to contribute more money to a 401(k), 403(b), individual retirement account (IRA) and similar retirement plans than normal contribution limits allow. However, the new rule says that some high earners must make catch-up contributions to a Roth plan going forward. That means you have to pay taxes on those contributions now, but qualified withdrawals are tax-free in retirement.
The law takes full effect in 2027 and applies to employees whose prior year’s Federal Insurance Contributions Act (FICA) wages from that employer exceeded a certain threshold. SECURE 2.0 set that limit at $145,000, with annual price adjustments beginning after 2025. In 2026, the IRS raised the limit to $150,000.
Anyone 60 to 63 years of age can make a “large” contribution. For the 2026 tax year, workers ages 60 to 63 can make withholding contributions of up to $11,250, compared to the standard withholding limit of $8,000. High earners should choose catch-up contributions like Roth contributions.
These changes do not affect your regular contributions. You can choose those as traditional or Roth, depending on your plan.
Why planning is important
The plans should be fully compliant by early 2027, meaning you may have time to organize them before the tax reform becomes official, if this applies to you. Since your contributions are tax-deferred, you may end up with a higher tax bill. You can check your past FICA earnings to determine if you will exceed the limit and be required to make withholding contributions to a Roth account.
A raise, bonus or job change can affect who is required to contribute to a Roth plan. Although you may end up with a higher tax liability now, being forced to make catch-up contributions to a Roth account can provide additional tax diversification in retirement. You can then opt out of a Roth retirement plan with qualified tax-free withdrawals for a portion of your living expenses instead of relying solely on the retirement plan where distributions are treated as ordinary income.
High earners should adjust their retirement plans
Better to prepare now than scoff at the end of the year. Be sure to review the contribution election before the start of 2027 and take the time to ask your HR department questions about your retirement plan if you do not understand how this change will affect you. You can also ask them or the plan provider how your employer will implement the Roth withholding requirement. Keep in mind that if they don’t offer a Roth option, you generally won’t be able to make catch-up contributions (unless the plan is amended).
You should also check how your taxes will differ going forward. High earners age 50 or older may have to plan for higher taxes for the current year. If you intend to maximize your deductions, most of your retirement contributions will be taxed today instead of when you withdraw them in retirement.
Roth contributions don’t automatically get better or worse. It depends on your financial situation, but you should pay close attention to how your income is taxed.
