A significant change is on the horizon for 401(k) plans that could alter the landscape of tax benefits for higher earners. Starting in 2025, employees will be allowed to contribute up to $23,500 to their 401(k) plans, while those aged 50 and over can make additional “catch-up contributions” of $7,500. For workers aged between 60 and 63, this catch-up limit expands to $11,250.
Traditionally, these catch-up contributions could be made as either pretax or after-tax Roth contributions, depending on the specific plan provisions. However, a new mandate stemming from the Secure 2.0 Act of 2022 will implement substantial changes beginning in 2026. Specifically, employees earning over $145,000 from their current employer will be required to make their 401(k) catch-up contributions as after-tax Roth contributions.
This forthcoming regulation could have significant implications for higher earners intending to maximize their retirement savings. In the meantime, older employees still have the flexibility to choose between traditional and Roth catch-up contributions, giving them an opportunity to strategize before the new rule takes effect.
Traditional contributions come with the benefit of an immediate tax deduction, but future withdrawals are subject to standard income tax rates. Conversely, Roth contributions do not offer an initial tax break, but they allow funds to grow tax-free, presenting a potentially lucrative option for long-term investors.
Experts recommend that individuals take proactive steps to assess their options. “Now is the time to work with your advisor or tax preparer to run multi-year tax projections,” advises certified financial planner Patrick Huey. This can help workers decide whether to prioritize pretax catch-up contributions while they still have the option or to shift focus towards Roth contributions in anticipation of the impending rule change.
According to a 2025 Vanguard report analyzing over 1,400 plans and nearly 5 million participants, while nearly all retirement plans offered catch-up contributions, only 16% of eligible workers utilized this benefit. Most participants who took advantage of catch-up contributions were earning $150,000 or more.
The decision to opt for either pretax or Roth contributions involves careful consideration of several factors, including current income levels, future tax brackets, and personal retirement and estate planning goals. Experts emphasize the importance of being proactive and not delaying decisions as the new regulations loom. “The key takeaway for investors is, do not sit on the sidelines as the rules change,” stresses financial advisor Jared Gagne.
