New Federal Rule Impacts 401(k) Catch-Up Contributions for Higher Earners
A new federal rule finalized last month will require Americans age 50 and older earning more than $145,000 to use after-tax money for any 401(k) catch-up contributions, potentially altering retirement savings strategies for many.
Starting in 2027, and potentially as early as 2026 for some plans, the change—stemming from provisions within the SECURE 2.0 Act—will impact how higher earners utilize catch-up contributions, which allow those 50 and over to save additional amounts beyond standard 401(k) limits; in 2025, individuals can contribute up to $7,500. This shift to Roth contributions means taxes are paid upfront, but withdrawals in retirement are tax-free. Financial experts note this change could have a disproportionate effect on areas with a high cost of living, like Long Island, where higher incomes are more prevalent. “On Long Island, earning $145,000 in W-2 wages is quite common, particularly among dual-income households or senior professionals,” said Great Neck-based adviser Jason Gilbert of RGA Investment Advisors LLC.
The rule change has both potential benefits and drawbacks, as it could affect eligibility for other tax deductions and credits. According to Data USA, a little over 1.1 million people statewide earn $140,000 or more, and Long Island’s median household income significantly exceeds the national average—$143,144 in Nassau County and $126,863 in Suffolk County—making a substantial portion of the population subject to the new regulations. This comes as the average New Yorker already faces a shortfall of nearly half a million dollars in needed retirement savings, according to recent reports. For more information on retirement planning, visit the IRS Retirement Plans website.
Financial planners recommend revisiting multiyear tax projections to determine the best course of action, considering options like Health Savings Accounts, backdoor Roth IRAs, or taxable brokerage accounts. AARP New York also offers resources to help individuals navigate financial wellness in retirement, recognizing that the high cost of living, particularly on Long Island, presents unique challenges for seniors. “Financial wellness into retirement is such a big concern for so many people and it’s something we all deserve,” said Robyn Haberman, associate state director at AARP New York.
Officials say the IRS has not yet posted catch-up limits for next year and will continue to provide guidance as the implementation date approaches.
