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Understanding a 401(k): How it works and why it\u2019s important<\/p>\n
What is a 401(k) plan? Key benefits and how to maximize your savings.<\/p>\n
Catch-up 401(k) contributions<\/a> will change next year for some older Americans, but whether it\u2019s good or bad depends on your tax outlook, experts said.<\/p>\n In 2026, Americans aged 50 and older earning at least $145,000 in the prior year must make their catch-up contributions to a Roth 401(k)<\/a>, the IRS said<\/a>. The rule was part of Secure Act 2.0 to go into effect from 2024 but was delayed, giving companies time to comply. It\u2019s the first mandatory Roth provision ever added to the tax code.<\/p>\n Since Roth 401(k) contributions are made after-tax, there\u2019s no upfront tax deduction for the money set aside for retirement. Instead, money grows and comes out tax free. The change-up may force older savers to take a fresh look at their tax situation, now and in the future, experts said.<\/p>\n “Maybe this is bad, but maybe not,” Isaac Bradley, director of financial planning at HB Wealth, told USA TODAY. “It depends on where you think your tax rate will be.”<\/p>\n What are catch-up contributions and the new rules?<\/p>\n For 2025<\/a>, Americans aged 50 and older can save an additional $7,500<\/a> annually in their employer-sponsored 401(k) plan<\/a>, bringing their total contribution limit to $31,000.<\/p>\n Those aged 60 to 63 may contribute an extra $3,750<\/a>, bringing the year\u2019s total allowable 401(k) contribution to $34,750.<\/p>\n At 64 years, the catch-up reverts to $7,500.<\/p>\n Since these amounts are adjusted for inflation each year, they\u2019ll likely be higher in 2026.<\/p>\n If employers offer a Roth and traditional 401(k)<\/a> in 2026, only employees who earned less than $145,000 the prior year at their current company can choose where to put their money. Those above the wage threshold must contribute their catch-up contributions to the Roth 401(k).<\/p>\n If the company doesn\u2019t offer a Roth 401(k), those high earners can\u2019t make any catch-up contributions.<\/p>\n What do tax rates mean for Roth 401(k)?<\/p>\n If the stock market or the value of your portfolio soars, tax rates may not bother you at all in the end, Conners said.<\/p>\n The new rule may force workers to pay the tax upfront and use a Roth 401(k), “and you may not like it, but let’s say you have 200% gains and don’t have to pay a cent on any of those gains,” Conners said. “When you pull those funds out tax-free, you’ll love it. It’ll be delayed gratification instead of instant gratification.”<\/p>\n All three major stock indexes \u2013 the blue-chip Dow, the broad S&P 500, and tech-heavy Nasdaq \u2013 have all posted double-digit returns<\/a> in each of the past<\/a> couple of years and look on pace to do so again.<\/p>\n Are people usually in a higher tax bracket when they retire?<\/p>\n Since most retirees no longer collect a regular paycheck, their income drops, and so do their tax rates.<\/p>\n But reality isn\u2019t always so simple, some experts said. How much you saved in traditional IRAs and 401(k)s,<\/a> withdrawals, and Social Security<\/a> can set off a “ticking tax bomb,” they said.<\/p>\n “In retirement, you have go-go, slow-go, and no-go years,” said John Jones, investment advisor representative at Heritage Financial.<\/p>\n During “go-go” years<\/a>, people are still healthy and want to travel, celebrate and check off bucket list items, so they may take larger withdrawals, Jones said. In “slow-go” years, withdrawals shrink as retirees settle down. “No-go” years may see withdrawals grow again with required minimum distributions (RMDs)<\/a>, higher health care costs or a “can\u2019t take it with you” attitude, he said.<\/p>\n Americans aged 73 must start taking minimum withdrawals annually from pre-tax, traditional retirement accounts. The larger those nest eggs, the larger the required withdrawals. Add in Social Security, and a single filer could “easily” be near the 22% income tax rate, Bradley said.<\/p>\n Why is the government making these 401(k) changes?<\/p>\n The government is hunting for money to help cover its massive spending, experts said.<\/p>\n “Roths (accounts) pay tax on the front end, so that helps with the math,” to make recent spending bills more palatable, Bradley said.<\/p>\n Medora Lee is a money, markets and personal finance reporter at USA TODAY. You can reach her at\u00a0mjlee@usatoday.com<\/a>\u00a0and\u00a0subscribe to our free Daily Money newsletter<\/a>\u00a0for personal finance tips and business news every Monday through Friday morning.<\/p>\n","protected":false},"excerpt":{"rendered":"Understanding a 401(k): How it works and why it\u2019s important What is a 401(k) plan? Key benefits and…\n","protected":false},"author":3,"featured_media":267875,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[15],"tags":[49488,47770,691,64,40472,2488,337,2487,619,652,139558,139559,641,644,663,942,642,450,950,5678,39458,255,27124,39460,18416,615,449,37997,700,5682,4143,85948,139560,6763,49413,39006,6228,645,2490,620,37999,618,448,447,456,639,662,661,646,67,132,68,643,467,640],"class_list":{"0":"post-267874","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-personal-finance","8":"tag-401k-plan","9":"tag-401k","10":"tag-ai","11":"tag-business","12":"tag-citizens","13":"tag-enabled","14":"tag-explainer","15":"tag-highlights","16":"tag-income","17":"tag-income-taxes","18":"tag-internal","19":"tag-internal-revenue-service","20":"tag-know","21":"tag-modular","22":"tag-modular-story","23":"tag-neutral","24":"tag-not","25":"tag-overall","26":"tag-overall-neutral","27":"tag-pension","28":"tag-personal","29":"tag-personal-finance","30":"tag-personal-income","31":"tag-personal-savings","32":"tag-plan","33":"tag-planning","34":"tag-point","35":"tag-preparation","36":"tag-retirement","37":"tag-retirement-u0026-pension","38":"tag-revenue","39":"tag-roth","40":"tag-roth-401k","41":"tag-savings","42":"tag-senior","43":"tag-senior-citizens","44":"tag-service","45":"tag-story","46":"tag-story-highlights-ai-enabled","47":"tag-tax","48":"tag-tax-preparation-u0026-planning","49":"tag-taxes","50":"tag-the","51":"tag-to","52":"tag-to-the-point","53":"tag-ttp","54":"tag-ttp-explainer-not-visual","55":"tag-ttp-what-we-know","56":"tag-u0026","57":"tag-united-states","58":"tag-unitedstates","59":"tag-us","60":"tag-visual","61":"tag-we","62":"tag-what"},"share_on_mastodon":{"url":"","error":"Validation failed: Text character limit of 500 exceeded"},"_links":{"self":[{"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/posts\/267874","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/comments?post=267874"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/posts\/267874\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/media\/267875"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/media?parent=267874"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/categories?post=267874"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/tags?post=267874"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}\n