A change in federal retirement planning rules finalized last month could potentially impact more people on Long Island, where higher salaries are more common due to the high cost of living, experts said.
Starting in 2027, the change will generally require Americans age 50 and older earning more than $145,000 to pay taxes upfront on 401(k) catch-up contributions that will be designated as after-tax Roth contributions. In 2025, individuals could set aside up to $7,500 in catch-up contributions to a 401(k), according to the IRS. Some retirement plans could adopted the rule even earlier, in 2026.
The rule change has both benefits and drawbacks, experts say.
While the Roth contributions can be withdrawn tax-free in retirement, individuals could end up paying more toward taxes in the long run, they said.
WHAT NEWSDAY FOUNDA new federal rule will require Americans age 50 and older earning more than $145,000 to pay taxes up front on 401(k) catch-up contributions.The change could have a disproportionate impact on the retirement savings of Long Islanders, who are more likely to earn more in a region infamous for its high cost of living.Under the new rule, Roth contributions will see tax-free growth but, “for people in their peak earnings years, this change could push up taxable income and affect eligibility for other deductions or credits,” one financial adviser said.
“On Long Island, earning $145,000 in W-2 wages is quite common, particularly among dual-income households or senior professionals,” said Great Neck-based adviser Jason Gilbert of RGA Investment Advisors LLC.
That means “a higher proportion of people in this area will be affected compared to those in regions with a lower cost of living,” he said.
Statewide, a little over 1.1 million people earn $140,000 or more, according to Data USA, a platform that visualizes public data.
On Long Island, U.S. Census Bureau data lists the median income per household for both counties in the six figures, at $143,144 in Nassau in 2024, and $126,863 in Suffolk, Newsday has reported — far higher than the national median income at $83,730, and $85,820 in New York.
That’s on par with the income level needed to survive in the region.
A recent ALICE study on Long Island found that, in 2023, a family of four would need a “household survival budget” of at least $109,452 in Nassau, and $110,448 in Suffolk, Newsday has previously reported.
Those numbers are higher with two children in child care, with Nassau families needing $133,380 and families in Suffolk needing $141,456, according to United Way.
The average New Yorker faces a shortfall of nearly half a million dollars in needed retirement savings, Newsday has reported.
What is a catch-up contribution?
After turning 50, the government allows workers to make additional contributions to their retirement savings each year in the form of catch-up contributions, said Ryan Derousseau, a financial planner at Hauppauge-based United Financial Planning Group.
Across the country, 70% of private industry workers had access to defined contribution plans such as a 401(k) and, as of March 2024, 50% chose to participate, according to federal data.
What is the upside to the rule change?
Workers who invest under the rule change, which requires them to make Roth contributions — meaning, they’ll pay taxes upfront rather than when making withdrawals in retirement — will benefit from tax-free growth, Gilbert said.
“This change reinforces the need for personalized planning,” he added, pointing out that “what works for a 55-year-old executive may not work for a 52-year-old educator. And Roth contributions aren’t automatically better; they’re just different.”
It’s important to “revisit multiyear tax projections to determine whether it makes sense to accelerate pretax contributions through 2026 or start a Roth now to diversify tax exposure in retirement,” he said.
Besides a 401(k), high earners can turn to other retirement planning options such as a Health Savings Account, or a tax-advantaged savings account for those enrolled in a high-deductible health plan, backdoor Roth IRAs if allowed, a strategy where a traditional IRA is converted into a Roth IRA, or taxable brokerage accounts, which “can be highly efficient when combined with tax-aware strategies such as direct indexing or municipal bonds,” Gilbert said.
What is the downside to the rule change?
A common planning strategy for individuals in their 50s, Derousseau said, is to wait to pay taxes on catch-up contributions until after they retire when they have a lower income.
“If you are in a higher tax bracket and you want the tax benefit today, then make sure to do more saving if you can in the next couple of years before this truly is in place,” he said.
Also, “for people in their peak earnings years, this change could push up taxable income and affect eligibility for other deductions or credits,” Gilbert said.
What does it take to retire on Long Island?
Retirement on Long Island is a challenge for many, said Jonathan Bowles, executive director at public policy think tank Center for an Urban Future.
Seniors in the region may be on the “verge of a financial insecurity crisis,” he said. “We have a boom in older folks who just aren’t prepared for retirement, especially as people are living longer, especially as costs are rising across the board.”
More than 1 in 10 Long Islanders 70 and older are not collecting Social Security income, and 45% have reported they don’t receive retirement income from other sources either, he said. That includes income from 401(k)s and IRAs.
“It’s a punishing cost of living, living in and around New York City. And when you’re on a fixed income, like so many older adults are, when you have very little savings, if any, you’re losing ground every year financially,” he added.
More than half a million people were age 65 and older on Long Island in 2023, a 24% increase from 10 years earlier, Newsday has reported.
On Wednesday, Gov. Kathy Hochul announced a state-sponsored retirement savings program for private sector workers who do not have access to a retirement plan through their employer.
Employees who participate in the state plan will be able to set aside contributions into portable Roth IRAs.
Resources for seniors
“Financial wellness into retirement is such a big concern for so many people and it’s something we all deserve,” said Robyn Haberman, associate state director at AARP New York, and lead for financial initiatives at the organization, which offers several resources.
AARP runs a biweekly virtual series called “Money Mindset” aimed to “empower people to take care of their finances,” including in retirement, she said.
AARP also oversees a group of volunteers who help people file their taxes for free.
Mostly, right now people seem to be concerned about whether they can continue to afford to support their lifestyles postretirement, she said.
The already high cost of living on Long Island has been pushed higher by rising prices due to inflation and tariffs.
“I think there’s a certain amount of pessimism right now, and I think that has a lot to do with that pesky inflation,” she said. “People are citing increases in household expenses, increase in debt and also health issues. Those are the top three reasons people give for being concerned about their finances.”
Brianne Ledda covers personal finance and affordability for Newsday. She previously covered Southold and Greenport for The Suffolk Times and is a graduate of Stony Brook University.