Last week, the federal government returned to work. The market was essentially flat, with the S&P 500 down just under 1%. The index is currently just over 6,700, and many analysts are predicting it may close over 7,000 – an additional 4% increase after a strong year-to-date performance. That said, if you are within five years of retirement, now may be a good time to assess the risk level in your portfolio.
Big changes are coming in 2026 for retirement plans. The IRS has released new contribution limits, with IRA limits increasing to $7,500 plus an additional $1,100 if you are over 50. For employer-sponsored plans like 401(k), 403(b), and the Thrift Savings Plan, you will be able to contribute $24,500. The catch-up contribution for participants over 50 is an additional $8,000, for a total of $32,500. If you are between 60 and 63 years old, your catch-up is $11,250, for a total of $35,750.
There’s a twist to the catch-up contributions, though. If your 2026 wages that are subject to FICA are over $150,000, your catch-up contribution will automatically be made as a Roth, or after-tax, contribution. While that will help with taxes in retirement, it has two immediate impacts. First, your tax bill will increase. You’ll pay taxes on the catch-up contribution, and most likely at a higher tax rate than you will have in retirement. Second, your take-home pay will decrease.
Currently, if you contribute to a retirement plan with pre-tax dollars, your net income is only reduced by what would have been the after-tax amount. For example, if you contribute $10,000, and the tax on that would have been $1,500, your paycheck is $8,500 less than it would have been if you hadn’t made the contribution. But if you contribute $10,000 in after-tax, or Roth contributions, your take-home pay is reduced by the full $10,000. If you have the ability to save, this change should not stop you from doing so. But you will notice a difference in your income.
The other increase is in the total combined contribution limit for employer-sponsored plans. If your plan allows, the upper limit is increasing to $72,000, plus any catch-up amounts. The difference between that limit and what you and your employer currently contribute is referred to as a Mega Backdoor Roth. If you’re over 50, this could mean that you contribute $32,500. As an example, let’s say your employer match is $10,000. That’s a total of $42,500. There is an additional $37,500 that can be contributed to the plan under IRS rules. These are called post-tax contributions. To make it work effectively, you need to contribute the post-tax amount and then convert it to the Roth portion of your account. The funds were already contributed after taxes, so the conversion is tax-free. This would allow a total contribution of $45,500 to your Roth 401(k). Remember that income limits don’t apply to employer-sponsored plans; that’s only for IRAs.
This is a good time to map out your savings strategy for 2026. How much to your emergency savings, investment accounts, retirement accounts, and college accounts. A good financial plan can help you establish priorities and understand the tax implications.
Your action item this week is finish your holiday lists. As Black Friday discounts start earlier and earlier, make your list now so that you have a plan and can take advantage of sales.
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CovingtonAlsina is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.