New tax rules require certain employees age 50 and older who earned more than $150,000 in W-2 wages in the prior year to make retirement plan catch-up contributions on a Roth basis. This change eliminates the upfront tax deduction and may increase taxable income, affect Medicare Part B and D premiums, and limit other income-based tax benefits. Beginning in 2026, individuals ages 60 to 63 can make higher catch-up contributions, increasing the potential tax impact. Understanding how Roth catch-up contributions affect adjusted gross income is essential to avoiding unintended consequences and coordinating a retirement strategy.
Read our overview on 2026 Retirement Plan Changes
Who Should Pay Close Attention
- Employees age 50+ who earn over $150,000
- Anyone turning 60–63 in 2026
- Employees who rely on catch-up contributions to meet retirement goals
- High earners trying to manage AGI, Medicare premiums, or tax phaseouts
What Are Catch-Up Contributions?
Workers aged 50 and older can contribute an extra $8,000 to most employer sponsored retirement plans, while those aged 60 to 63 can contribute an additional $11,250 to their 401(k)s in 2026. These are known as catch-up contributions and are in addition to the normal deferral limit of $24,500.
New Roth Requirement for High Earners
A new law requires “high-income” workers, those who earned over $150,000 in the previous year, to make catch-up contributions to a Roth account, eliminating the up-front tax deduction. The earnings test is applied per individual and per employer based on your W2 wages from each in the previous year, not your household income and not your current year’s income. High earners who are self-employed do not receive W-2 wages and are generally exempt from this change. The new law also does not apply to IRAs, including SIMPLE and SEP IRAs.
How Could This Impact Your Tax Situation?
Traditional retirement plan contributions are deducted from taxable income, with taxes paid on withdrawals—including investment growth—during retirement. Roth contributions, by contrast, are made on an after-tax basis, allowing for tax-free withdrawals of both contributions and earnings in retirement. As a result, traditional contributions typically increase take-home pay today, while Roth contributions may create a higher tax burden now and lower take-home pay.
Roth catch-up contributions can have ripple effects beyond income taxes, increasing adjusted gross income and influencing Medicare premiums and other income-based thresholds.
Employer retirement plans are implementing these changes differently. Some plans are automatically directing eligible catch-up contributions to Roth accounts, while others require employees to actively elect or approve the change. Participants who do not take the required action risk having their catch-up contributions suspended. For this reason, it is important to confirm how your employer plans to implement the new rules and to understand how the change may affect take-home pay, tax liability, and overall savings strategy.
Example: The Tax Impact of Roth Catch-Up Contributions
A 61-year-old in the 35% tax bracket contributing the full catch-up limit of $11,250 to a traditional 401(k) subtracts that amount from their taxable income saving nearly $4,000 in taxes. The same contributions made on a Roth basis result in a higher adjusted gross income potentially disqualifying them from tax breaks or pushing them into a higher tax bracket. Higher adjusted gross income can impact Medicare Part B and D premiums (IRMAA), Net Investment Income tax exposure, phaseouts for itemized deductions or credits, and capital gains tax planning.
Planning Opportunities
Of course, it’s not all bad! Roth balances have the benefit of tax-free withdrawals and freedom from the mandatory distributions owners of traditional accounts are subject to beginning in their 70s!
Planning considerations may include:
- Long-term contribution strategy
- Increasing pre-tax contributions earlier in your career
- Tax coordination
- Tax-loss harvesting
- Charitable giving strategies
- Timing of income or bonuses
- Future flexibility
- Evaluating whether Roth dollars improve long-term flexibility, particularly for tax and estate planning
What Should You Do Now?
- Confirm eligibility
- Determine whether your 2025 W-2 wages will exceed $150,000
- Understand employer implementation
- Ask your employer how Roth catch-up contributions will be handled and whether action is required on your part
- Evaluate the personal impact
- Review how Roth catch-up contributions may affect:
- Take-home pay
- AGI-based deductions and credits
- Medicare IRMAA brackets (if applicable)
- Review how Roth catch-up contributions may affect:
- Plan ahead
- Adjust tax withholding if needed to avoid underpayment
What Should You Do Now?
If you’re approaching age 50—or especially 60 to 63—and earned over $150,000 last year, this change could materially impact your tax bill and retirement strategy.
At PDS Planning, we monitor these changes proactively and help clients adjust before they become costly surprises. If you’re looking for a proactive financial advisor who works for a flat fee and reviews your picture on a comprehensive basis, we’d love to hear from you!
Curious about our flat fee model? Learn more.
Frequently Asked Questions
Recent tax law changes affect how certain retirement contributions are treated. These are some of the most common questions we’re hearing.
Employees age 50 or older who earned more than $150,000 in W-2 wages from an employer in the prior year are required to make catch-up contributions to a Roth account under the new rules. The income test is applied per individual and per employer, not at the household level.
No. The $150,000 threshold is based solely on your individual W-2 wages from a specific employer in the prior year. Household income and current-year earnings are not considered.
Generally, no. Most self-employed individuals do not receive W-2 wages and are typically exempt from the Roth catch-up requirement. The rule also does not apply to IRAs, including SEP and SIMPLE IRAs.
Because Roth catch-up contributions increase adjusted gross income, they can push income above Medicare IRMAA thresholds, potentially increasing Medicare Part B and Part D premiums in future years.
Employer plans are handling the rule change differently. Some automatically switch eligible participants to Roth catch-up contributions, while others require employees to actively elect or approve the change. If required action is not taken, catch-up contributions may be suspended.
Not necessarily. While Roth contributions offer tax-free withdrawals and flexibility later in life, the near-term impact on taxable income, cash flow, and income-based thresholds should be evaluated in the context of your broader financial plan.
Yes. Roth balances are not subject to required minimum distributions during the owner’s lifetime and can provide greater flexibility for future tax planning and estate planning when coordinated properly.
Before contributing, it’s important to review expected income, tax withholding, the impact on adjusted gross income, potential Medicare premiums, and how Roth dollars fit into your overall retirement and estate planning strategy.
