Roth-Only Catch-Up Rule Leaves $150,000 Earners Short

A payroll change that took effect in January requires workers earning more than $150,000 to make 401(k) catch-up contributions as after-tax Roth money, and many affected savers now have withholding running short of what they will owe.

A payroll rule that switched on in January is quietly rewriting the tax math for older, higher-paid savers. Workers earning more than $150,000 can no longer make 401(k) catch-up contributions on a pre-tax basis. Those dollars must go in as Roth money — taxed on the way in, tax-free on the way out — and for many of the people affected, the change has already opened a gap between what payroll is withholding and what the IRS will expect next filing season.

The mechanics are the problem. A pre-tax catch-up contribution reduces taxable wages in the year it is made. A Roth catch-up contribution does not. Same paycheck, same deferral amount, different taxable income — and if withholding elections were set when the contribution was still pre-tax, the number on the W-4 is now calibrated to a smaller tax bill than the one actually accruing.

Why the tax bill moved without anyone changing their savings rate

Most savers in this bracket did not make a decision. Their plan administrator made it for them, because the rule leaves no choice for wages above the $150,000 line. The deferral kept coming out of the paycheck at the same rate. What changed is the character of the money: it is now after-tax, so the deduction that used to offset it disappeared.

That is why the shortfall is easy to miss. There is no new line item, no reduced contribution, no plan notice that reads like a tax event. Take-home pay may look broadly similar, because the deferral itself is unchanged. The difference shows up only when taxable wages are tallied — and by then the withholding for the year is largely locked in.

As 24/7 Wall St reports, the change took effect in January and is already reshaping the tax position of high earners making catch-up contributions, with withholding running short for many of them.

Who actually crosses the line

The rule is aimed at earners above $150,000. That threshold does two things worth understanding. First, it is a wage test, not a household test — what matters is compensation from the employer sponsoring the plan, which is why two spouses with similar joint income can land on opposite sides of the rule. Second, it is a cliff, not a phase-in: crossing it flips the treatment of the catch-up dollars entirely rather than gradually.

That creates some awkward cases. A worker whose base salary sits below the threshold but who earns a bonus or commission can be pushed over it. Someone who changes jobs mid-year may be treated differently at each employer, because each plan applies the test to the wages it paid. And workers who are only just above the line face the largest relative surprise, because they are the group least likely to have assumed the rule applied to them at all.

The fix is a withholding adjustment, not a savings cut

The natural instinct — stop the catch-up contribution to make the tax problem go away — is usually the wrong one. Roth catch-up dollars still grow and still come out tax-free in retirement. Abandoning them to avoid a withholding mismatch trades a permanent benefit for a temporary cash-flow annoyance.

The cleaner response is to true up withholding for the remainder of the year. Practical steps for anyone who thinks they are caught by the rule:

• Check the plan statement or payroll detail to confirm whether catch-up deferrals are being coded as Roth rather than pre-tax.
• Compare year-to-date taxable wages against what was assumed when the current W-4 was filed. The catch-up amount is the likely source of any gap.
• File a revised W-4 with extra withholding for the remaining pay periods, rather than waiting to settle up at filing time.
• If income is lumpy — bonuses, commissions, equity vesting — consider whether estimated payments are the better tool.
• Ask whether the employer's plan even offers a Roth option; if it does not, high earners may find catch-up contributions unavailable rather than reclassified.

Correcting withholding mid-year is unglamorous but it is the difference between a manageable adjustment across a handful of paychecks and a single unpleasant number in the spring, potentially with an underpayment penalty attached.

Paying tax now, in a market that has been climbing

There is a second-order question worth sitting with, because the rule forces a choice most savers never consciously made: pay tax on retirement contributions now, or later. Roth treatment is a bet that the tax rate applied to those dollars today is lower than the rate that would apply when they are withdrawn — and that the account grows meaningfully in between.

Growth is the part investors tend to fixate on, and equity markets have not made the argument harder. As of the last trade at 19:58 GMT on August 27, 2026, the S&P 500 tracker SPDR S&P 500 ETF Trust (NYSEARCA: SPY) changed hands at $771.05, up 0.65% on the day from a prior close of $766.08. The Invesco QQQ Trust (NASDAQ: QQQ), which tracks the Nasdaq 100, traded at $721.04, up 1.36%, while the SPDR Dow Jones Industrial Average ETF Trust (NYSEARCA: DIA) sat at $535.21, up 0.18%. The longer a contribution compounds, the more valuable tax-free withdrawal becomes — which is the strongest thing to be said for a rule most affected savers did not ask for.

The weaker part of the bargain is timing. High earners in their peak compensation years are, almost by definition, paying tax at or near their highest lifetime rate. Forcing catch-up dollars into Roth treatment strips away the choice to defer that tax into lower-income retirement years. For some savers the mandate is a gift; for others it is a real cost. The rule does not distinguish.

What to watch through year end

Three things matter between now and December. Whether payroll providers and plan administrators have correctly identified everyone over the threshold — misclassification cuts both ways and can require corrections. Whether employers without a Roth option in their 401(k) add one, since without it affected employees simply lose access to catch-up contributions. And whether workers near the line who expect a fourth-quarter bonus recheck their position after it lands, because that is the moment many will cross the threshold for the first time.

The rule itself is settled. What is not settled is how many people discover it before filing season rather than during it.

Key facts

• Income threshold: Applies to earners above $150,000
• Effective date: Payroll change took effect in January
• Contribution type: 401(k) catch-up contributions must be after-tax Roth
• Market context (last trade 19:58 GMT, Aug 27, 2026): SPY $771.05, +0.65%; QQQ $721.04, +1.36%

Frequently asked questions

Who does the Roth catch-up rule apply to?

It applies to workers earning more than $150,000 who make 401(k) catch-up contributions. For those savers, catch-up dollars must now be contributed as after-tax Roth money rather than pre-tax. The test is based on compensation from the employer sponsoring the plan, so a job change mid-year can mean different treatment at each employer.

When did the change take effect?

The payroll change took effect in January. Because plan administrators applied it automatically, most affected savers saw no change in their contribution rate and received no obvious signal that the tax character of their catch-up dollars had shifted from pre-tax to Roth.

Why is my withholding running short?

Pre-tax catch-up contributions reduce taxable wages; Roth contributions do not. If your W-4 was set when catch-up dollars were still pre-tax, withholding is calibrated to a lower taxable income than you are actually reporting. The gap grows with every pay period until the election is corrected.

Should I stop making catch-up contributions to avoid the tax?

Usually not. Roth catch-up contributions still compound and still come out tax-free in retirement. Stopping them removes a permanent benefit to solve a temporary cash-flow issue. The more direct fix is to file a revised W-4 with additional withholding, or to make estimated tax payments if income is lumpy.

What if my employer's 401(k) has no Roth option?

If the plan does not offer Roth contributions, high earners above the threshold may find catch-up contributions unavailable rather than simply reclassified. That makes it worth asking the plan sponsor directly whether a Roth option exists or is being added before year end.

Is Roth treatment good or bad for high earners?

It depends on the individual. Roth treatment is a bet that today's tax rate is lower than the rate that would apply at withdrawal. High earners in peak compensation years are often taxed at their highest lifetime rate, so the mandate removes a valuable deferral for some savers while benefiting those with long compounding horizons.

Sources

• Earn Over $150,000? Your 401(k) Catch-Up Contributions Just Went Roth Whether You Wanted the Tax Bill or Not — 24/7 Wall St

Photo: Tima Miroshnichenko · Pexels Licence — source