For most of our cross-border retirees, their U.S. 401(k) plan is their most significant asset. Recently, there have been big changes in how much you can contribute and the types of contributions you can make. Recent changes may lead to higher taxes in 2026, but that may not be a bad thing in the long run. We discuss this and more in our most recent video.
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Summary
Quick recap
This video focused on explaining changes to 401 plans in 2026, particularly how higher earners will be required to make catch-up contributions into Roth accounts instead of pre-tax contributions, which could increase taxes for some individuals. Bryan, a certified financial planner and chartered financial analyst, discussed the differences between pre-tax and Roth contributions, explaining that while pre-tax contributions offer an immediate tax benefit, Roth contributions provide tax-free growth and withdrawals, making them advantageous for cross-border retirees planning to return to Canada. He emphasized that while the 2026 tax increase may seem negative, it could actually benefit retirees in the long term by allowing them to pay lower U.S. taxes today and withdraw funds tax-free in the future, especially if they move to Canada, where tax rates are higher.
Summary
401 Plan Changes for Cross-Border Workers
Bryan discussed significant changes to the 401 plan that could increase taxes for some individuals by 2026, but noted that for certain cross-border workers between the U.S. and Canada, these changes might not be detrimental. Bryan, a certified financial planner and chartered financial analyst, emphasized the importance of the 401 plan for many cross-border retirees and offered to help simplify their retirement planning.
U.S. 401 Retirement Plan Basics
Bryan discussed the basics of U.S. 401(k) retirement plans, explaining that they are funded through payroll contributions and often include employer matching contributions. He highlighted two key decisions for participants: whether to make pre-tax or Roth contributions, and how much to contribute. Bryan also mentioned significant tax changes coming in 2026 that could affect cross-border retirees.
Roth vs Pre-Tax 401 Contributions
Bryan explained the differences between pre-tax and Roth 401 contributions, noting that pre-tax contributions provide a tax benefit today but grow tax-deferred, while Roth contributions are after-tax but grow and can be withdrawn tax-free, making them advantageous for those returning to Canada. He emphasized that for clients returning to Canada, maximizing Roth contributions is beneficial due to lower U.S. tax rates compared to Canada.
2026 401 Plan Contribution Limits
Bryan explained the 401 plan contribution limits for 2026, recommending a minimum of 10-15% of income, with a maximum contribution of $24,500 for those under 50. For those over 50, the limit increases to $32,500, while individuals aged 60-63 can contribute up to $35,750 under a new super catch-up rule.
Roth Catch-up Contribution Changes
Bryan explained that in 2026, catch-up contributions for higher earners must go into Roth accounts if their income in 2025 was over $150,000, with contributions based on W-2 earnings rather than joint tax returns. This change does not affect new employees, who can still make pre-tax catch-up contributions regardless of their income. Bryan noted that for higher income earners who previously maxed out pre-tax catch-up contributions, taxes are likely to increase as these contributions will now be made to Roth accounts.
Roth Contributions Tax Benefits
Bryan explained the tax implications of Roth contributions, noting that while there is no current tax benefit, there is a future tax advantage when withdrawals are made. He provided examples of how much taxes would increase for different income levels, emphasizing that while taxes may rise, having tax-free money in retirement is beneficial. Bryan concluded that none of the families they work with are upset about having Roth accounts in retirement.
Roth Account Benefits and Planning
Bryan discussed the benefits of contributing to Roth accounts, particularly when tax rates are low and may increase in the future, making tax-free withdrawals more advantageous. He highlighted the advantage for individuals planning to move to Canada, where tax rates are typically higher, allowing them to benefit from tax-free withdrawals in a foreign country. Bryan emphasized the importance of planning for both U.S. and Canadian retirement accounts and encouraged scheduling a consultation to create a comprehensive retirement plan.
I’m not sure I would categorize the 401(k) catch-up contribution needing to be made to a Roth 401(k) as a major change, as it only impacts those who are 50 and older, maxing out their contributions, with income over $ 145,000 in 2025, and who would have otherwise made their catch-up contribution to a pre-tax account.