IRS Opens a $35,750 Retirement Contribution Window — But Higher Earners Face a Costly Tax Tradeoff

Workers nearing retirement often face a tough tradeoff: they want to build enough savings to cover years without a paycheck, even as inflation, healthcare costs, and everyday expenses continue to strain their budgets. Every extra dollar set aside can make a difference.

The IRS is now offering some older workers a chance to boost retirement savings under rules created by the SECURE 2.0 Act. Eligible employees can contribute up to $35,750 to workplace retirement plans in 2026, far above what most workers are able to save.

Still, there is a tax downside that could leave higher earners owing more upfront.

A Higher Contribution Limit for Older Workers

For 2026, the standard employee 401(k) contribution limit rises to $24,500, up from $23,500 the year before. Workers age 50 and older may add another $8,000 as a catch-up contribution.

A separate rule gives workers who turn 60 through 63 during the year an even larger catch-up amount of $11,250.

Here is how the limits break down:

That means eligible workers can save an extra $3,250 each year compared with the regular catch-up limit.

The expanded provision started in 2025 and generally applies to most 401(k), 403(b), governmental 457(b), and Thrift Savings Plans that allow catch-up contributions.

For workers who are trying to make up a retirement savings gap, the four-year window creates a meaningful chance to build a larger nest egg before leaving the workforce.

The Tax Catch

The downside is that the IRS is trading one benefit for an immediate tax cost.

Starting in 2026, workers whose employer-reported Social Security and Medicare wages for the prior year exceed $150,000 will generally have to make catch-up contributions to a Roth account instead of a traditional pretax 401(k).

That changes when taxes are due. Traditional 401(k) contributions lower taxable income now, while withdrawals in retirement are generally taxed. Roth contributions are made with after-tax money, but qualified withdrawals are tax-free.

For example, a 62-year-old worker in the 24% federal tax bracket making the full $11,250 catch-up contribution could reduce current federal taxes by $2,700 under a traditional pretax setup. With the mandatory Roth treatment, that immediate tax break disappears.

In other words, that worker could pay an additional $2,700 in federal income taxes this year, assuming the full contribution would otherwise have been deductible at a 24% marginal rate.

The money is not necessarily wasted, though. Roth withdrawals that meet the rules are free from federal income taxes, and tax-free investment growth can make Roth accounts attractive. Even so, for people trying to save as much as possible while handling current household expenses, the upfront tax cost is real.

How to Use the Rule to Your Advantage

The key point is that the Roth requirement applies only to catch-up contributions, not necessarily to the entire $35,750. In many cases, higher earners can still make the standard $24,500 contribution on a pretax basis while sending the $11,250 catch-up portion into Roth savings. Workers below the $150,000 prior-year wage threshold can generally continue making pretax catch-up contributions if their plans allow it.

The opportunity should not be dismissed simply because retirement is close. Contributing an extra $3,250 a year for four years would add $13,000 in principal before any investment gains.

That added cushion could help cover future expenses or soften the impact of possible Social Security benefit cuts.

Bottom Line

The IRS has created a valuable opening for retirement savers, but higher earners need to understand the new tax rules before increasing their contributions.

The $35,750 limit can strengthen retirement finances for older workers. At the same time, the mandatory Roth catch-up rule means some savers will owe more in taxes now in exchange for possible tax advantages later.

Before making changes, check your employer’s retirement plan, confirm whether you qualify, and estimate how the Roth requirement affects your take-home pay. The opportunity may be worth using, but the tax bill should not come as a surprise.