UpTrajectory Review

The IRS closed a long-running tax-shelter strategy this January, and a lot of high earners aged 50 and older apparently did not notice. Under Section 603 of the SECURE 2.0 Act, workers whose prior-year FICA wages exceeded $150,000 (up from $145,000 in 2024, indexed annually per IRS Notice 2025-67) can no longer make pre-tax catch-up contributions to a traditional 401(k). Those extra dollars must now go into an after-tax Roth account. For 2026, the base deferral limit rises to $24,500 and the standard catch-up for those 50 and older increases to $8,000, with a higher $11,250 catch-up still available for workers aged 60 to 63. Only the catch-up portion triggers the Roth mandate, so the first $24,500 can still be pre-tax.

For a small-business owner or operator, this is not an abstract retirement-policy story. It directly changes the math on compensation, benefits design, and personal tax planning. If you earn above the $150,000 wage threshold and are 50 or older, you just lost the ability to deduct up to $8,000 (or $11,250 if you are 60 to 63) from your taxable income during what are often your peak earning years. That could mean several thousand dollars in additional federal and state tax liability annually. Owners who also administer their company's 401(k) plan face an operational burden: payroll systems must correctly identify who crosses the threshold, apply the Roth-only rule to catch-up dollars, and communicate the change so participants are not surprised at tax time.

What is genuinely new here is not the law itself, which was passed in late 2022, but the enforcement reality now settling in. The original SECURE 2.0 text would have applied the Roth mandate starting in 2024, but the IRS delayed implementation twice, creating a fog of uncertainty that likely lulled many savers and plan sponsors into inaction. The Vanguard data cited in the piece, drawn from roughly 5 million plan participants, suggests contribution patterns are shifting, but the article does not quantify how many high earners have actually adjusted. We are skeptical of any implication that workers have broadly caught on. The gap between the rule taking effect and participant awareness is precisely where compliance risk and financial harm live.

The downstream effects split along income and plan-design lines. High earners at large employers with robust Roth options and strong payroll systems will feel this mainly as a higher current-year tax bill, offset by tax-free growth later. But workers at smaller firms face a sharper problem: many small-business 401(k) plans do not offer a Roth option at all, and if the plan lacks one, affected participants may be unable to make any catch-up contribution whatsoever. That is a perverse outcome where a law intended to boost retirement savings actually reduces contribution capacity for some older workers. Owners who have not yet added a Roth feature to their plan should treat this as an urgent to-do, both for their own finances and for the benefit competitiveness of their workforce.

Watch for further IRS guidance on edge cases, such as how the wage threshold applies to self-employment income, partners, and S-corp owners whose W-2 wages may fall below $150,000 while total income far exceeds it. Also monitor whether Congress entertains any legislative relief, though that seems unlikely in the near term. In the meantime, if you are a high earner aged 50 or older, run the numbers with a tax advisor now: compare the immediate tax cost of Roth-only catch-ups against the long-term benefit of tax-free withdrawals, and consider whether shifting other savings into pre-tax vehicles can offset the lost deduction. If you sponsor a plan, confirm your recordkeeper is correctly applying the rule and that participants have been clearly notified. The January effective date has already passed; the next tax filing season will be the real test of who was paying attention.

“Millions of older workers counted on pre-tax 401(k) catch-up contributions to shave thousands off their annual tax bills during their highest-earning years.” — TheStreet

Takeaway: If your 2025 wages topped $150,000 and you are 50 or older, your 401(k) catch-up contributions must now go into a Roth account, eliminating the upfront tax deduction.