High earners have to pay tax on their catch-up 401(k) contributions and deposit them into workplace Roth accounts
Dear Dan,
I just got my first paycheck of the year, and it shows that some money is now going in the Roth part of my 401(k). I didn’t switch any to Roth, so I called HR. They said it’s a new rule and I had no choice. That doesn’t sound right to me. Are they getting something by going Roth? I make good money, max out every year and want that tax deduction as I near retirement. Anything I can do?
—Ticked off in Tampa
Dear Ticked,
You will not be the only one ticked off about this, but your employer is not getting anything from your funds going into a Roth account in your 401(k). In fact, depending on exactly how the plan is administered and how that administration is paid for, their costs may have risen due to the increased complication.
I suspect you are over age 50, are making catch-up contributions and earned more than $150,000 in 2025 with this employer. The Secure 2.0 Act of 2022 contained a provision that was supposed to go into effect in 2024 but was delayed until this year. It requires anyone making catch-up contributions to a 401(k), 403(b) or governmental 457(b) plan who earned more than $150,000 in 2025 (indexed for inflation in future years) to make those contributions to a Roth account.
Generally, the $150,000 refers to W-2 wages subject to FICA received from the organization sponsoring the plan in 2025. Therefore, those hired during 2025 with high annual salaries may still be able to make pretax catch-up contributions for 2026 if their W-2 reflects less than $150,000 in applicable income.
Contributions to Roth accounts are not deductible, unlike the traditional pretax catch-up contributions. This means you have lost the $8,000 tax deduction you were expecting (or up to $11,250 if you will be between ages 60 and 63 on Dec. 31), which makes your annoyance understandable.
Though annoying, there are benefits to having money in the Roth account. The biggest positive is that if a few criteria are met, at age 59½ and later, any money withdrawn from the account will be tax-free. Another frequently cited plus to Roth accounts is that there are no required minimum distributions during your lifetime.
One small silver lining is that you’ve seen this early in 2026 and have a chance to incorporate the lack of deduction into your planning. It’s worth checking to make sure your tax withholdings are appropriate.
It is probably of little comfort, but there are some workers who are finding they are no longer able to make catch-up contributions of any kind because of this new provision. Plans are not required to offer Roth options. If no Roth option is available, workers making over $150,000 in 2025 wanting to make catch-up contributions will be out of luck.
For some of those workers who can no longer make catch-up contributions, contributing to a Roth IRA — either through a conventional contribution or a so-called backdoor Roth IRA contribution — could be a viable substitute for the banned catch-up contribution to the 401(k). However, a Roth IRA will not be available to many due to income limitations, nor attractive due to the pro-rata rule.
The Secure 2.0 Act made other changes that created new options that plans could choose to offer. Any changes will be found in the Summary Plan Description.
This is a good time for participants of all income levels and all ages to reassess their retirement plans. At a minimum, you should review how much you are contributing; whether it is pretax, after-tax or Roth; where the money is invested; and the amounts of your tax withholdings — and make any needed adjustments.
Doing this early in the year typically makes adjustments easier to absorb.
If you have a question for Dan, please email him with “MarketWatch Q&A” on the subject line.
Originally published on MarketWatch. Read the original article here.