What Changes Are You Making in 2026?
Every year marks a fresh start—a valuable opportunity to pause, reflect on past experiences, and set your sights on the future. As the times are always “a changing,” your approach to retirement planning should continue to evolve as well. Planning ahead and coordinating a tax-efficient account withdrawal strategy in retirement is important. The new catch-up rule under the Secure 2.0 Act could help with this now.
Many clients prioritize saving as much as possible through workplace retirement plans such as 401(k)s, 403(b)s, governmental 457 plans, or the Thrift Savings Plan. If you maximize pre-tax contributions, including catch-up contributions, you lower your taxable income today. However, over time, your retirement savings can grow into a large pre-tax balance that will be taxed as ordinary income once you begin withdrawing money from them. If you must take out funds unexpectedly prior to retirement the tax impact can be significant, depending on your age. Even routine, planned withdrawals—such as those required after a certain age—add to other income sources, including pensions, deferred compensation, and Social Security. This additional income can bump you into a higher tax bracket. It can also raise your Medicare premiums or make it harder to qualify for deductions on medical and dental expenses.
Starting in 2026, individuals who earn over $150,000 (see box three of Form W-2) the previous year are considered “highly paid individuals (HPI).” If an HPI makes a catch-up contribution (up to $8,000 at age 50 or $11,250 between ages 60 and 63), those dollars must be deposited into a Roth account. While these catch-up contributions are included in your taxable income in the year made, qualified withdrawals (including growth or earnings) from the Roth account are tax-free.
Even if your employer does not provide a Roth 401(k) or you are not classified as an HPI, it is still worthwhile to consider contributing to a Roth (eligibility varies by income). Unlike other workplace retirement plans previously mentioned or a Traditional IRA, dollars from a Roth account (including Roth 401k) are not subject to required minimum distributions during your lifetime. As a result, these assets can grow tax-free for longer and qualified withdrawals during your lifetime are tax-free. Additionally, if this account has been open for at least five years and is eventually inherited by a loved one, withdrawals remain tax-free.
Having retirement savings in a few different buckets, including after-tax savings outside of retirement plans, will create flexibility in meeting cash flow needs while balancing tax impact. At West Financial Services, these are exactly the types of considerations we help our clients navigate. Our team reviews your investments, evaluates your retirement strategy, and examines your entire financial picture to ensure you make the most of every opportunity available to you. We are committed to empowering you with the knowledge and guidance you need to feel confident about your financial future. Our goal is to maximize your retirement potential. Contact us today to schedule a discussion on how recent legislative changes may affect your financial goals. Together, we can design a plan tailored to your needs. This will help you move forward with confidence and peace of mind.
Source: irs.gov
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