Higher Earners Are Losing a Tax Break on Retirement Savings. There’s a Silver Lining.

Workers over age 50 may lose a tax break on some 401(k) contributions starting next year. (Dreamstime)

Older workers earning more than $150,000 a year are about to lose a tax break on retirement savings. It isn’t as bad as it might seem—there are still good reasons to max out savings plans like 401(k)s.

The change applies to “catch-up” contributions in 401(k)s and similar retirement plans. For 2026, those catch-up amounts are $8,000 for workers 50 and over and $11,250 for those ages 60 to 63. They come on top of the maximum contribution of $24,500 for everyone. (Above 63, it goes back to $8,000.)

Starting next year, catch-ups for certain workers 50 and over must be routed into a post-tax Roth account. The rule applies to those making over $150,000 this year, as the income threshold applies to prior-year earnings.

The change means that savers who had been making catch-up contributions to a traditional, pretax 401(k) will lose the income tax deduction on that amount.

But the tax break isn’t going away; it’s being deferred. Since Roth contributions are taxed on the way in, they are tax-free on the way out. And Roth accounts still allow you to grow your savings tax-free, rather than paying taxes on dividends or capital gains.

Catch-up contributions are a great way for older workers to sock away extra money at a time when other financial obligations, like college tuition payments, might be in the rearview mirror. In 2024, 51% of workers with incomes of more than $150,000 made catch-up contributions, according to Vanguard’s How America Saves 2025 report.

Older workers at their peak earnings might favor the tax break of a traditional 401(k). Money deposited into those accounts is subtracted from your gross income for the year, reducing your tax bill or increasing your refund.

But Roth 401(k)s and Roth IRAs have advantages. A big one is that they aren’t subject to required minimum distributions for the original owner, so that money can grow until it’s needed or passed down to heirs.

“Having money you can take when needed and not have it forced out can be comforting to people,” says Jane Gorham Ditelberg, director of tax planning at the Northern Trust Institute.

Many advisors recommend a mix of pre- and post-tax money in retirement for maximum flexibility. To that end, higher earners may choose to route more than just catch-up portions to Roth accounts.

The decision of whether to fund a Roth versus a traditional account involves a bet on your future income and tax rates—which will determine whether it’s better to pay your taxes now or later. Many savers hedge their bets and contribute a portion of their savings to each.

Another benefit of Roth withdrawals is that they won’t increase your taxable income. That may be especially useful now that there’s a $6,000 senior deduction for those 65 and over in place through 2028. Roth withdrawals also won’t increase your income for purposes of calculating Medicare Parts B and D premiums, which are subject to a surcharge for higher-income retirees.

Contributions to Roth IRAs are subject to income limits, making Roth 401(k)s more attractive for higher earners who want to accumulate post-tax money. The income phaseout range—the window in which allowed contributions to Roth IRAs notch down to zero—is between $153,000 and $168,000 for singles and heads of household in 2026. For married couples filing jointly, the range is between $242,000 and $252,000.

There are some wrinkles. Roth earnings can only be withdrawn tax-free if the account has been open at least five years and the holder is at least 59½ years old. (The principal can be withdrawn anytime, tax- and penalty-free.)

In some scenarios, it may be better not to contribute to a Roth. Say you’re 60 and plan to retire in a couple of years and tap your savings right away for living expenses. In that case, you might be better off saving outside of a retirement account, Ditelberg says.

You might also decide against Roth catch-up contributions if there’s another pressing need for those funds, like paying down high-interest debt, or if you plan to donate your nest egg to charity.

For most people, though, it’s still a good idea to max out your retirement savings, even if that means using a Roth for catch-ups. The eventual tax savings are still substantial, and if you don’t take advantage, it’s like “cutting off your nose to spite your face,” says Bethany Dever, a certified financial planner at Rockland Trust.

Write to Elizabeth O’Brien at elizabeth.obrien@barrons.com