High Earners Age 50 and Older Are About to Lose a Major 401(k) Tax Break

[Zorro]

The option to make pretax catch-up retirement contributions is going away for those savers

One of the biggest retirement-saving perks for workers age 50 and older is about to get new restrictions.

Starting next year, the extra catch-up contributions that those workers use to stow money in their 401(k)s will have to go into their accounts after tax for high earners. The Internal Revenue Service issued final rules this month on a 2022 law, which set the threshold for a high earner at more than $145,000 in wages.

This change means many workers will pay taxes on their catch-up money upfront during high-earning years instead of in lower-earning years in retirement. The money would go into a Roth account, where it can later be withdrawn tax-free.

It is the first time the tax code is mandating Roth savings, which give the government its cut up front.

A 60-year-old in the 35% tax bracket could lose a nearly $4,000 deduction for an $11,250 super catch-up contribution. That raises adjusted gross income, which could disqualify people from other tax breaks that phase out at higher income levels, such as deductions for student-loan interest and for state and local taxes. It could also push these workers into higher tax brackets.

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