For many investors, a key element of their investment portfolio is their employer sponsored retirement plan (called a 401k, 403b, etc – depending on your employer type). These plans allow for automated savings via payroll withholdings, come with a preset menu of investments, and often include an employer match – making them very popular with investors.

These plans also allow employees to take advantage of tax deferral strategies if they so choose (can contribute pre-tax dollars and therefore exclude a portion of current year earnings from current taxable income). However, as part of the SECURE 2.0 act of 2022, tax legislation recognized the possible magnitude of this tax deferral benefit for certain employees and put changes in place that are finally taking effect in 2026.

If you’re 50 or older, you have been able to make catch-up contributions – which are contributions above the dollar amount for workers under age 50. The thinking behind these contributions is that you can contribute more in the years right before retirement, allowing you to make up ground on your savings (ie: “catch up”) In 2026, the standard contribution limit is $24,500. Catch-up for those over 50 is another $8,000. And a “super catch-up” for those 60-63 (if the plan allows) is an additional $3,250 for a total catch-up of $11,250.

The changes taking effect take aim at the tax benefit from contributing pre-tax dollars. Before this year, any employee could choose to make catch-up contributions with pre-tax dollars, allowing for an even greater pre-tax deduction against their wages.

Starting in 2026 under the new rules, for any employee that had wages over $150,000 (as reported in the prior year W2), these catch-up contributions can no longer be made with pre-tax funds. Rather, the catch-up dollars need to be allocated to a Roth subsection of the employer plan – which means there is no associated current tax deduction.

This is not entirely terrible news as Roth funds are helpful in the future – while you pay taxes now, you will not have to pay taxes on the funds when they are ultimately withdrawn. However, for some higher earners, they may believe their tax rate in the future will be lower than it is today – but again, starting in 2026, there is no choice to be made on the catch-up contribution for higher earners.

The challenge to this rule change is some employer plans are not set-up to offer Roth contributions. If that is the case and you fall above this earnings level, you simply won’t be allowed to make the catch-up contributions. This could impact retirement strategies, so it’s important to understand your plan’s rules and adjust accordingly. Be sure to reach out to your financial advisor with questions and address if these changes apply to you and your employer plan.