The $150,000 Handcuffs

Dear Clients and Friends,

Over the past few years, the retirement planning industry has gone through significant changes in terms of legislation (apologies in advance for all the acronyms!). The CARES Act was passed in 2020, followed by SECURE 2.0 in late 2022. And who could forget the behemoth OBBBA that was passed on the 4th of July last year?

One of the major hallmarks of SECURE 2.0 has already kicked in and created some confusion for the masses, especially for folks aged 50+. Once you turn 50, the government allows you to “catch up” on your retirement savings and contribute additional funds to any personal retirement accounts (IRAs) or employer accounts (401K, 403B, 457B, etc.). See below for the stats, courtesy of Google’s Gemini 3.

2026 401(k) Contribution Limits

Age Category	Standard Deferral Limit	Catch-Up Contribution	Total Max Contribution
Under 50	$24,500	N/A	$24,500
50-59 or 64+	$24,500	$8,000	$32,500
60 to 63 (Special)	$24,500	$11,250	$35,750

As you were logging in to your retirement plans through work to modify your contribution rates on the first day of the New Year (I hope!), did you receive any alerts about modifying your catch-up savings? If you didn’t, let me explain. Before 2026, catch-up contributions for W2 employees aged 50+ by December 31st were allowed to be made on a pre-tax basis to reduce your taxable income. Fast-forward to 2026: per Secure 2.0, if your wages from the prior year from work exceed $150,000, you’re no longer allowed to make pre-tax contributions for the catch-up. They will now be taxed upfront, just like how a Roth-styled account works. Congratulations, you’re now classified as a “High Earner!”

For our self-employed folks that don’t receive wages: this will not impact you! However, if you operate either an S-Corp or C-Corp and part of your compensation is salary, this will impact the salary component of your income.

Of course there are various positives and negatives with this new rule. Let’s start in reverse and touch upon the negatives first.

• More Taxes, More Problems – There will be more bills due to the government and less after-tax income you’re taking home.

• Plan Limitations – If your employer doesn’t have any Roth features within their retirement plan, then employees can’t make any catch-up contributions. Fortunately, the Plan Sponsor Council of America reports that ~96% of employers have Roth capabilities. But for the unlucky remaining 4%, this is an issue.

• “All Roads Lead to Rome” – There are multiple ways of building your tax-free bucket of assets. You can make backdoor Roth IRA contributions during your working years, convert pre-tax accounts to Roth accounts during your lower tax or retirement years, and you can possibly adopt a Health Savings Account.

Now for the positives:

• Forced Diversification – This allows high earners to expand their collection of accounts with both pre- and post-tax options. As of the end of 2023, nearly a quarter of Americans have a Roth IRA (according to the Investment Company Institute.)

• Tax Free Growth & Income – Any potential growth in Roth accounts is tax free, and withdrawals are not taxed! In order for the earnings to be tax free, the account needs to be open and funded 5 years beforehand.

• Required Minimum Distributions (RMDs) – Roth IRAs and 401Ks don’t have any RMDs, whereas pre-tax accounts do, which would reduce taxes during your retirement years.

So, what’s the angle with this new rule anyways? This rule allows the government to collect revenue immediately, as opposed to your pre-tax accounts where revenue isn’t likely to be due until you’re forced to withdraw your Required Minimum Distributions. This seems like an ideal solution in times like these, when our government’s deficits continue to explode and spending doesn’t seem to be slowing down. (By the way, if you want a scare, take a look at our country’s debt clock...)

In my opinion, having flexibility and autonomy in choosing what’s best in anyone’s given situation is ideal. However, having diversified accounts is a desirable and favorable outcome when it comes to your tax allocation. At the end of the day, the pros outweigh the cons, and it will be short-term pain for long-term gain. We at MOR Wealth still advocate for continuing to make your catch-up contributions despite the non-pretax savings.

As always, reach out if you have any questions.

Devin