If you're 50 or older, run an S-corp, and pay yourself a six-figure W-2 salary, a quiet change to the tax code just took away one of your favorite year-end moves. Starting January 1, 2026, if your FICA wages topped $150,000 in 2025, every dollar of your 401(k) catch-up contribution has to go into a Roth account — after-tax, no deduction, no exceptions. For years you could dump an extra $7,500 (now $8,000) into a traditional pre-tax bucket and watch your taxable income shrink. That lever just moved to the other side of the ledger.
This isn't a proposal or a rumor. It's a final IRS regulation implementing a piece of the SECURE 2.0 Act, and it's mandatory — not something your plan administrator can opt out of if you cross the threshold. If you're a founder, partner, or self-employed professional who has been quietly maximizing catch-up contributions every December to manage your tax bill, this is the year that habit needs a rewrite.
What Actually Changed
Since 2001, anyone 50 or older has been allowed to contribute extra money to a 401(k) beyond the standard employee deferral limit — the "catch-up contribution." Historically, you could choose whether that catch-up went into your traditional pre-tax account or a Roth account, if your plan offered one. Most high earners chose pre-tax, because it lowered their current-year taxable income.
The SECURE 2.0 Act (passed back in 2022) eliminated that choice for a specific group of people, with the rule finally taking effect for the 2026 plan year. Here's the mechanism:
- The threshold: If your Social Security-taxable (FICA) wages from the employer sponsoring your 401(k) exceeded $150,000 in the prior calendar year, every catch-up dollar you contribute this year must be Roth.
- The lookback: The number that matters is your 2025 W-2 Box 3 wages from that specific employer — not your household income, not your business's total revenue, and not investment income.
- The amount involved: For 2026, the standard catch-up limit is $8,000 (up from $7,500 in 2025). If you're 60 to 63 during the calendar year, you qualify for the larger "super catch-up" of $11,250 instead.
- No opt-out: If you cross the wage threshold, the Roth requirement is automatic. If your employer's plan doesn't currently offer a Roth 401(k) option, the plan literally cannot accept your catch-up contribution at all until it adds one.
The dollar threshold itself is indexed for inflation. The SECURE 2.0 statute originally wrote it as $145,000; the IRS bumped it to $150,000 for the 2026 measuring year. Expect it to creep upward most years going forward, similar to how contribution limits themselves adjust annually.
Why This Specifically Hits Small Business Owners
Employees at large companies will feel this too, but the rule lands with unusual precision on a category of small business owner: the S-corp owner-employee who pays themselves a "reasonable" W-2 salary and takes the rest of their profit as a distribution.
That salary-versus-distribution split is a well-worn tax strategy — W-2 wages are subject to payroll tax, distributions generally aren't. It works fine for payroll tax purposes. But this new rule cares only about one number: the W-2 wage figure reported to the Social Security Administration. If you set your reasonable-compensation salary at, say, $160,000 to stay defensible with the IRS, you've now crossed the catch-up threshold regardless of how modest your total household income looks after expenses.
Compare that to a true sole proprietor or single-member LLC with no S-corp election. Under IRC §401(c), self-employment earnings aren't "FICA wages" in the technical sense the regulation uses — they're net earnings from self-employment. Multiple benefits administrators covering solo 401(k) plans have pointed out that a sole proprietor who has never elected S-corp status, and therefore never issues themselves a W-2, is generally not subject to the mandatory Roth rule at all, even at high income levels. That's a real structural difference between otherwise-similar small business owners, and it's worth confirming with your CPA rather than assuming either way.
Partners in a partnership who receive guaranteed payments face similar analysis — guaranteed payments aren't FICA wages either. But if your business is a C-corp or an S-corp and you draw a paycheck, the wage figure on your W-2 is what triggers the rule, full stop.
The Math: What You Actually Lose
The mechanical change is simple, but the financial impact depends on your bracket. A pre-tax catch-up contribution reduced your taxable income dollar for dollar in the year you made it; a Roth catch-up contribution does not — you pay ordinary income tax on that $8,000 (or $11,250) now, and in exchange the money grows tax-free and comes out tax-free in retirement, including all its earnings.
For someone in the 32% marginal bracket, an $8,000 pre-tax catch-up used to shave roughly $2,560 off this year's tax bill. Losing that pre-tax option doesn't cost you the $8,000 — you're still allowed to contribute it — but it does cost you the immediate deduction, and it changes your cash flow: you now need $8,000 of already-taxed money to fund the same contribution, rather than $8,000 of gross income.
For most business owners past 50, this isn't a reason to stop contributing. Historically low current tax brackets, a long runway to retirement, or an expectation that rates will be higher later are all arguments that make Roth treatment genuinely fine, even attractive. The point isn't that Roth is bad — it's that the choice was taken away, and any tax-bill projection you built assuming a pre-tax catch-up deduction needs to be redone before you file.
What to Check Before Year-End
- Confirm whether your plan offers Roth deferrals at all. Not every 401(k) — and not every solo 401(k) provider — has added a Roth option. If yours hasn't, affected participants may be locked out of making any catch-up contribution in 2026 until the plan is amended. Ask your plan administrator or third-party administrator directly; don't assume it was handled automatically.
- Pull your actual 2025 W-2 Box 3 figure, not your salary estimate. The threshold measures Social Security wages specifically, which can differ slightly from Box 1 taxable wages depending on pre-tax deductions.
- Re-run your withholding and estimated tax calculations. If you were counting on the catch-up deduction to offset a high-income year, that offset is gone for the affected portion of your contribution — you may owe more than you planned, especially if you also make quarterly estimated payments as a business owner.
- Revisit your reasonable-compensation number with your accountant if you're an S-corp owner near the threshold. This isn't a reason to artificially suppress your salary — the IRS scrutinizes unreasonably low S-corp wages — but it's a new variable worth naming explicitly in that annual conversation.
- Look at HSA and backdoor Roth IRA room as supplemental tax-advantaged savings if you're trying to rebuild some of the deduction you lost. An HSA contribution, if you're on a high-deductible health plan, remains fully pre-tax regardless of income.
A Worked Example
Say you run a marketing consultancy taxed as an S-corp. You're 54, and in 2025 you paid yourself a reasonable-compensation salary of $170,000, taking the rest of the year's profit as a distribution. You've historically maxed out your 401(k): the standard employee deferral plus the full catch-up, all pre-tax, because it reliably knocked your taxable income down before your accountant even started your return.
For 2026, your regular deferral limit is $24,500. Because your 2025 W-2 wages ($170,000) blew past the $150,000 threshold, your $8,000 catch-up now has to be Roth — no exceptions, regardless of what you'd prefer. Your total contribution capacity hasn't shrunk (you can still put in $32,500 total), but $8,000 of it now comes from after-tax dollars and won't lower this year's federal or state taxable income. If you were budgeting quarterly estimated payments around the assumption that the full $32,500 would be a deduction, you're now short by whatever your marginal rate applies to that $8,000 — plan the extra payment before your Q4 estimate is due, not after.
Now compare that to your business partner, a freelance copywriter operating as a single-member LLC with no S-corp election. She's 52 and earned $185,000 in net self-employment income last year, comfortably more than you. But because she never issues herself a W-2 — her income flows through as self-employment earnings, not FICA wages — the mandatory Roth rule doesn't apply to her at all under current guidance. She can still direct her full catch-up contribution to a traditional, pre-tax solo 401(k) account. Same income bracket, same age range, structurally different outcome, purely because of entity choice and how compensation is documented.
Common Mistakes to Avoid
- Assuming your total household income determines the threshold. It doesn't. The rule looks only at FICA wages from the specific employer sponsoring the plan. A spouse's income, investment income, or a second job's wages under the threshold don't change your obligation.
- Waiting until December to check whether your plan supports Roth deferrals. Plan amendments and payroll system updates take time. If your provider hasn't added a Roth option, find out in Q1 or Q2, not during your last paycheck of the year.
- Forgetting to re-check the threshold every year. Because it's based on the prior year's wages and adjusts for inflation, someone who was under the limit in 2025 could cross it in 2026 after a raise, and vice versa if compensation drops. This isn't a one-time determination — it's an annual check.
- Treating this as purely a payroll or HR problem. The tax consequence lands on you personally at filing time. Loop in your accountant or tax preparer as soon as you know your prior-year wage figure, not after the contribution has already been made.
Why This Belongs in Your Bookkeeping, Not Just Your Tax Folder
Retirement contribution rules like this one are exactly the kind of change that's easy to miss until your accountant flags it in April — by which point the tax-year decisions are already locked in. The owners who catch changes like this early are usually the ones who keep an actual running ledger of payroll, distributions, and benefits elections throughout the year, rather than reconstructing everything from bank statements at filing time.
That's the case for treating your books as a living record instead of a year-end chore. Beancount.io gives you plain-text accounting — every payroll run, distribution, and retirement contribution lives in version-controlled files you can query, diff, and audit anytime, not buried in a proprietary database you only open once a year. If you're already tracking W-2 wages and owner distributions as separate accounts, a rule like the mandatory Roth catch-up is a five-minute check instead of a year-end scramble. Get started for free and see what plain-text accounting looks like for a growing business.