By: Donald Albach
For many Americans approaching retirement, the 401(k) catch-up provision was one of the most practical and meaningful planning tools available. It was designed to help workers age 50 and older who, due to family obligations, housing costs, healthcare expenses, or career disruptions, were unable to fully maximize retirement savings earlier in life. By allowing additional contributions on a pre-tax basis, the rule helped late-career earners save more and reduce taxable income during what are often their highest earning years. With a new portion of the SECURE 2.0 Act taking effect this year, that lifeline was just ripped away.
What Happened?
As of January 1, 2026, the Pre-Tax 401(k) Catch-Up Contribution framework changed due to the passage of the SECURE 2.0 Act (2022). Under this legislation individuals who earn more than $150,000 in prior-year W-2 FICA wages, a threshold indexed for inflation, may only make catch-up contributions as Roth (after-tax) contributions. In effect, the provision remains, but the traditional pretax deferral that made it valuable for so many savers has been eliminated.
Economic Context and Inflation Impact
What makes this change particularly impactful is the economic backdrop in which it arrives. After several years of elevated inflation, households are dealing with higher prices for essentials like food, housing, insurance, and healthcare. For example, food prices rose more than 20 percent between 2020 and 2024, and healthcare costs continue to outpace wage growth, with employer-sponsored health coverage projected to exceed $18,000 per employee annually in the coming years. Against this reality, defining $150,000 of income as “high income” for purposes of removing tax benefits feels disconnected from the lived experience of many working Americans.
Examples of Impact
To understand the real-world impact, consider a married couple versus a single filer.
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A married couple, both over age 50, where one spouse earns $160,000, and the other earns $180,000 in W-2 wages:
Under prior rules, if each spouse made a $7,500 catch-up contribution, their combined $15,000 contribution would have reduced their taxable income by that same amount. Assuming a combined federal and state marginal tax rate of approximately 32 percent, that would have resulted in a $4,800 tax deferral that year. Under the SECURE 2.0 Act changes, those same contributions must now be Roth, meaning the couple pays the tax upfront and permanently loses that annual deferral benefit.
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A single filer, earning $155,000 in W-2 income:
Under prior rules, if they made a $7,500 catch-up contribution, it would have reduced taxable income by that amount. At an estimated marginal tax rate of 30 percent, that individual would have deferred approximately $2,250 in taxes. Under the new rule, the contribution is still allowed, but the tax deferral is eliminated, hence the full tax is owed in the year after the income is earned.
Tax Advantages and Roth Benefits
It is important to note that Roth contributions are not inherently negative. Roth accounts provide the benefit of tax-free growth and tax-free income in retirement, which can be valuable for managing future tax brackets and mitigating Medicare premium surcharges. However, for many W-2 earners already stretched by higher living costs, the loss of immediate tax relief can reduce cash flow flexibility at a time when expenses, from groceries to insurance premiums, remain elevated.
Alternative Tax Planning Strategies
This shift may prompt many higher-income earners to explore other strategies to help manage taxes.
A commonly used approach, in an environment where traditional deductions are increasingly limited, is charitable planning. For instance, charitable contributions can provide deductions against income when structured effectively. Donor-advised funds allow taxpayers to take a deduction in a high-income year of up to 60%, while distributing funds to charities over time. As well, donating appreciated assets may avoid capital gains while still generating a charitable deduction.
Why This Matters
At its core, the catch-up provision was meant to help people make up for lost time, saving for retirement. While the SECURE 2.0 Act preserves the ability to contribute additional dollars, eliminating the pre-tax option for earners over $150,000 shifts more of the tax burden to today, at a moment when many households are still grappling with the lingering effects of inflation, higher interest rates, and rising healthcare costs. For those nearing retirement, this change makes proactive, holistic planning more important than ever.
How Millstone Financial Group Can Help
At Millstone Financial Group, we understand that legislative changes like this can be overwhelming. Our award-winning firm can help navigate your wealth and help you attain peace of mind with:
- Tax-smart strategies: we identify several ways to help mitigate the tax impact of Roth and traditional contributions.
- Visualization & Scenario Planning: Through advanced modeling and retirement simulations, we help you see how your finances might unfold under future legislative changes. This can give you clarity and control under different spending or market conditions.
Bottom Line: In an environment marked by persistent financial complexity, the SECURE 2.0 Act is a reminder of how critical it is to reassess your strategy and ensure your retirement plan still aligns with your long-term goals.
Schedule a complimentary consultation by calling (732) 385-8544 or emailing info@millstonefinancial.net.
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Advisory services are offered through Millstone Financial Group Limited Liability Company, a Registered Investment Advisor in the State of New Jersey. Insurance products and services are offered through Millstone Financial Group Limited Liability Company.
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