New Rule, Tax Benefits Change for Catch-Up Contributions: High Earners 50 and Older to Lose Tax Break

The landscape of retirement savings is undergoing a significant change, particularly for high earners participating in plans like the Thrift Savings Plan (TSP) and 401(k)s. A new rule, set to take effect, will impact how catch-up contributions are handled, potentially altering tax strategies for those nearing retirement. Immediate tax-deferred advantages for high earners could be lost. Starting next calendar year, if you’re an employee making more than a certain amount, you won’t be able to reduce your taxable income with catch-up contributions.

Overview of the New Rule, including Income Tax Limit

Starting in the year 2026, a new rule, stemming from the Secure 2.0 Act, will change the way high-income earners add money to retirement plans such as 401(k)s, 403(b)s, SEP IRAs, SIMPLE IRAs, and the TSP. This tax change mandates that those with FICA income exceeding $145,000, employees must make catch-ups on an after-tax basis, into a Roth option, losing the immediate tax break typically associated with pre-tax contributions and possibly leading to a higher tax rate. Contributions to a Roth IRA are restricted by income, but not with the Roth TSP. No matter the income, federal employees can contribute to a Roth TSP, and in 2026, making a catch up contribution might have to be put in a Roth. 

Tax Preparation Rule Change Implications for High Earners

For high earners, this new rule means a shift in tax strategy. While previously, you could lower your tax bill immediately by making pre tax catch-up contributions, you will now have to pay taxes on that income upfront. This new rule potentially increases their taxable income in the current tax year, impacting your take-home pay. However, the potential advantage lies in the possibility of tax-free withdrawals in retirement, assuming you fall into a lower tax bracket during retirement. Therefore, you may save more on taxes later, while increasing your immediate tax liability when you file your taxes.

Understanding FICA Limits and Employee Benefits

The threshold for this new rule is determined by the amount of income subject to FICA taxes, which includes Medicare and Social Security taxes. For those with FICA income at or above $145,000, all catch-up amounts must be designated as Roth contributions, meaning they are made after-tax. FICA is the amount of earned income subject to social security and Medicare. This new rule could affect your retirement savings strategy if no longer able to defer taxes as pre tax contributions reduce your taxable income. 

Catch-Up Contributions Explained: Eligibility and Contributions

The “catch up” amount was designed to help you, if you’re 50 or older, to boost your retirement savings. As you approach retirement, the ability to make these additional contributions can help you build a bigger nest egg. The IRS allows you to make these additional contributions if they’re 50 or older.

Thrift Savings Plan and 401k Catch-Up Contribution Limits for 2025

In 2025, employees age 50 and older can contribute $7,500 more than the standard contribution limit ($23,500). Contributions to a traditional retirement account give an immediate tax break, lowering your taxable income. Roth contributions can help save for retirement, but you lose immediate tax cuts on the contributions you make. These limits are determined on an annual basis and increase in response to economic conditions such as inflation.

Additional Tax Limits for Employees Aged 60 to 63

Some retirement plans, like the Thrifts Savings Plan (TSP), offer even more generous catch-up limits for employees aged 60 to 63. These employees, depending on the plan’s specifics, might be able contribute up to $11,250 in catch-up contributions for the current year.

Estimate your retirement income with our Thrift Savings Plan Calculator.

Roth Accounts and Tax Benefits

The shift to Roth contributions under the new rule will affect how high earners manage their retirement and financial goals, especially if their tax rate is higher due to the change. By mandating that catch-up deposits must be made on an after-tax basis, the Secure 2.0 Act is essentially pushing high earners towards Roth accounts, which offer the potential for tax-free withdrawals in retirement. Roth balances are also typically not subject to required minimum distributions at age 73. 

Impact on Immediate Tax Breaks

One of the most immediate and noticeable impacts of this new rule is the loss of the immediate tax break that comes with pre-tax contributions. Previously, high earners could lower their taxable income in the current tax year by making pre tax catch-up contributions. Now, they will have to pay income tax on these contributions upfront. Because of this, their take-home pay may shrink as they file their tax return.

Contribution Change and Long-Term Tax Implications

While the loss of the immediate tax deduction might seem like a disadvantage, the long-term tax implications of Roth contributions could be quite beneficial. The primary advantage is the potential for tax-free withdrawals in retirement – as long as the account is open for at least five years before withdrawals are made. If you anticipate being in a lower tax bracket during retirement, the Roth option might lead to significant tax savings over the long term, potentially lowering your tax bill substantially.

Effects on Retirement and Tax Planning: Pros and Cons

Federal employees and other high earners might want to reevaluate their financial plan due to the new tax rule, which was set to take effect in tax year 2024, but was delayed to allow plans without Roth accounts to add the retirement savings option. (Roughly 93% of such retirement plans, including the TSP, have a Roth account option.) 

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Possible Positive Outcomes of the New Rule

One potential positive outcome of the new rule regarding catch-up limits is the possibility of paying fewer taxes in retirement. By making after-tax Roth contributions now, high earners could potentially avoid paying taxes on those savings when they withdraw the money during retirement, or after turning age 59 ½ . If individuals find themselves in a lower tax bracket in retirement, the tax-free withdrawals from Roth accounts can lead to significant tax savings and lower their tax bill.

Negative Consequences of Losing Pre-Tax Advantage

A significant negative consequence of the new rule is the loss of the immediate pre-tax advantage. Under the old system, high earners could reduce their taxable income in the current tax year by making tax-deferred catch-up contributions. With the new rule, this tax deduction is no longer available, which means that they will now pay income tax on the contribution amount upfront, lowering their take-home pay. This means that their federal tax, and possibly state income taxes, will be higher.

Conclusion and Future Considerations: Summary of Key Points

In summary, the new rule taking effect in 2026 regarding catch-up contributions represents a significant tax change for workers, both public and private, participating in retirement plans. This change requires those with FICA income above $145,000 to make catch-up contributions on an after tax Roth basis. This tax change eliminates the immediate tax break but offers the potential for tax-free withdrawals in retirement.