A new Internal Revenue Service rule is reshaping retirement saving for higher earners. Workers with pay at or above $150,000 who make 401(k) catch-up contributions must now route those dollars into Roth accounts, giving up the immediate tax deduction that used to come with pre-tax catch-ups. The change affects older employees adding extra savings at work and employers that run retirement plans.
New IRS rule affects high-income earners making 401k catch-up contributions.
Workers earning $150,000+ must now use Roth accounts, losing tax deductions.
What Changed and Why It Matters
Catch-up contributions let workers age 50 and over put more into their 401(k) plans on top of the standard limit. Under the rule, those extra dollars must go to a Roth source for higher-paid workers. Roth contributions are made after tax. They do not lower current taxable income. Instead, future withdrawals can be tax-free if rules are met.
The policy goal is simple: raise near-term tax revenue while nudging more savers to build tax-free income in retirement. Supporters say it balances the budget impact and long-term security. Critics argue it removes a key tax break right when older workers are trying to close retirement gaps.
Who Is Affected
The rule targets employees with higher wages who are old enough to make catch-up contributions. These workers lose the ability to make those extra dollars pre-tax in a traditional 401(k). Their base deferrals can still be pre-tax or Roth, but the catch-up portion must be Roth if their pay crosses the threshold.
The impact is larger for those in higher tax brackets. A forced switch to Roth increases current-year taxable income. That can affect eligibility for credits, Medicare premiums, or tax withholding patterns.
The Numbers Savers Need
- 401(k) employee contribution limit for 2024: $23,000.
- Catch-up limit for those 50 and older in 2024: $7,500.
- Workers earning $150,000 or more must put the catch-up amount into Roth, not pre-tax.
- Roth dollars are taxed now; qualified withdrawals are tax-free later.
How Employers and Plans Are Responding
Plan sponsors face new payroll and recordkeeping steps. Systems must confirm a worker’s pay and direct catch-up dollars to the Roth source for those over the line. Employers also need clear plan terms, updated enrollment tools, and employee notices.
Smaller employers may feel the strain most. They rely on outside payroll firms and plan providers, and even small coding errors can misroute contributions. Vendors are updating software and offering checklists. Education is front and center, since many workers confuse base deferrals with catch-ups.
What Savers Can Do Now
Workers near or above the threshold can adjust strategies. Some may increase pre-tax base deferrals earlier in the year to manage taxable income, then add Roth catch-ups later. Others may welcome the forced diversification of tax buckets, pairing pre-tax savings with Roth for flexibility in retirement.
Financial planners often suggest modeling both paths. If current taxes are high and future taxes are expected to be lower, losing the pre-tax catch-up stings. If future taxes could rise, Roth catch-ups may pay off.
Broader Implications
The rule shifts when taxes are paid, not whether they are paid. That timing matters for federal budgets and household cash flow. It also widens access to Roth balances inside workplace plans, which can be useful for retirees managing required distributions and brackets.
The change could alter saving behavior. Some higher earners may trim total catch-ups because of the upfront tax cost. Others may keep saving, focusing on the value of tax-free withdrawals later. Plan participation rates and contribution patterns will be worth watching.
The bottom line: higher-paid workers who rely on 401(k) catch-ups will now give up the immediate tax break and build Roth balances instead. Employers need clean systems and clear messaging to keep contributions compliant. Savers should revisit withholding, retirement projections, and tax planning. Watch for further IRS guidance and plan updates that refine how the rule is applied across payrolls and plan platforms.
