The 2027 401(k) Number Is Coming: The One Setting to Change Before January

Derek WuThe IRS usually posts next year's retirement limits in late October or November. We're recording in late October, so the twenty twenty-seven number is sitting in the mail and it hasn't arrived. Projections put the twenty twenty-seven four zero one K limit at twenty-five thousand five hundred dollars. For anyone fifty or older, the catch-up is projected at eighty-five hundred on top of that. Notice I said projections. That word matters. Think of it like a package with a tracking page. You know roughly when it lands and you know what's in it, you just can't sign for it yet. One page, taxpayers dot net, said as of about October eighteenth that the twenty-five thousand five hundred dollar figure is calculated from September CPI under a section of the tax code, IRC section four fifteen D. It also says the IRS notice is still the official source. So the figure is expected, not confirmed. Those are different words, and I'm keeping them different. Now, does that mean you wait? No. Set the rate now. If the IRS number comes in different, you adjust it higher or lower. That's one more visit to a settings page and you're editing one number, not starting over. Waiting feels responsible. It isn't. Waiting is just a way to let January show up before you've done a boring thing. Here's why that matters in practice. Your payroll system doesn't know the IRS number either. It only knows the percentage you typed in. So whatever you sent is your best estimate until the notice lands, and a good estimate beats an empty field. The fifty-plus catch-up works the same way. That eighty-five hundred is projected too, so treat it as expected, not confirmed. Think about what being slightly off cost you. If the final number lands a bit different, you've edited one field. If you never said anything, you've edited nothing, and that's the more expensive mistake. For a baseline, a CPA firm summary of IRS notice twenty twenty-five dash sixty-seven puts this year's four zero one K limit at twenty-four thousand five hundred dollars. The catch-up is eight thousand dollars. So the projected jump is about a thousand dollars on the base. Spread over a year of paychecks, that's small per paycheck. But small per paycheck is exactly how it slips past people. And I'm skipping the big table of limits. You don't need a table. You need one setting changed once in one sitting. It's dry, I know. Nobody has ever gotten excited about a payroll percentage. That's fine. Boring is the point. So the number is coming whether or not you act. Now the actual move, the math. It's one division problem. The task fits on a sticky note. Take the yearly limit, divide it by the number of paychecks you get, and turn that into a percentage of your pay. Set it once. One sitting, not a weekend project. The brief for this episode frames it as one move. Reset your payroll percentage once in a single sitting and then leave it alone. Let me use a made-up example, clearly an illustration. Say you're paid every other week. That's twenty-six pay periods in a year. Now pick a round pretend limit of twenty-six thousand dollars. Divide by twenty-six and you get one thousand dollars per paycheck. That's the dollar amount you'd need leaving each check. Next, the percentage. Payroll systems usually ask for a percent, not dollars. So say your paycheck before taxes is four thousand dollars. A thousand dollars is a quarter of that. So you'd type twenty-five. Those numbers are invented. Use your own gross pay per check off your pay stub and your own pay schedule. Where do you find those pieces? Your pay stub is the first stop. It usually shows how often you're paid and your gross pay for the period. Then log in to your payroll or retirement plan website and look for something like contribution rate or deferral. The label varies from employer to employer. Some systems take a dollar amount instead of percent. If yours does, skip the conversion and type the per paycheck figure directly. If you're paid twice a month, that's twenty-four checks and the division changes. Same steps, different divisor. Let me run one more pretend schedule so the pattern sticks. Say you're paid monthly. That's twelve checks. Keep the same invented twenty-six thousand dollars and divide by twelve. You get about two thousand one hundred sixty-seven dollars per check. Now suppose your gross for that month is eight thousand dollars. Divide two thousand one hundred sixty-seven by eight thousand and you land near twenty-seven percent. Round it to twenty-seven. Again, invented numbers. The shape is what matters. The fewer checks you get, the bigger each one has to carry. And a weekly version because some people get that. Weekly is fifty-two checks. Divide the same twenty-six thousand by fifty-two, and you get five hundred each. If your gross is twenty-five hundred a week, that's twenty percent. Notice what stayed the same. The yearly total never changed. Only the slicing did. Now, what does a screen look like when you're done? It varies, and I can't tell you your employer's layout. But most systems have some kind of review or confirm step before the change takes. Don't skip it. Read the number back to yourself. Make sure you type the percent in the percent box and not a dollar amount, then save. What if the system won't accept your number? Some plans cap the percentage you can pick. If that's yours, set the highest allowed and move on. You can ask the plan administrator about it later, and that's a separate task. And if you can't hit the max, set the highest percentage you can live with. A partial plan is still a good plan, and good enough beats perfect here. A percentage that's close set today does more than an exact one you never get around to. Then there is the quiet check afterwards. On your next pay stub, look for the new deferral line. If the percentage took, you're finished. If the stub looks unchanged, that's your cue to log back in. It's a thirty-second look, and you only do it once. One more thing about the percentage: if you get bonuses, check whether your plan applies your percentage to those too. It's a one-time look at the settings page. So the whole job is find your pay periods, divide, convert to a percent, type it in, save. Ten minutes, and you stop thinking about it. That covers the base. Here is the catch that can quietly break the plan if you're fifty or older. Now a rule that changes what kind of account your catch-up money has to go into, not just how much. Schwabs guide to catch-up contributions says that since January first, twenty twenty-six, if you turn fifty or older by December thirty-first and you earned over hundred and fifty thousand dollars in prior-year FICA wages, your catch-up must go in as Roth. That means after-tax. Everyone else can still choose traditional or Roth catch-ups where the plan allows. You might ask, prior-year wages? Yes, last year's pay decides this year's treatment. Your raise this year doesn't flip the switch until next year, so someone could be right at the line and not know which side they're on. That's why the number to find is on your W-2. Mercer, a benefits consultancy, explains the IRS final regulations this way: employers can use box three Social Security wages on the W-2 to decide who is covered. Box three is findable. It's a two-second look. And the threshold moved. A CPA firm summarizing IRS Notice twenty twenty-five sixty-seven says it rose from a hundred and forty-five thousand to a hundred and fifty thousand based on those prior-year box-three bossed wages. Now the part that stings. Employee Fiduciary's guide to the final rules says if your plan has no Roth option, those participants cannot make catch-up contributions at all. At all? Not a smaller one? Not a traditional one? None. The rule says Roth. The plan can't take Roth, so the catch-up door is closed, and that's a setting someone could miss for a whole year. One carve-out. The same guide says workers with no FICA wages from the sponsor are not subject to the Roth-only rule. That's narrow. So what does it do to a paycheck for someone who is covered? The CPA firm's summary puts it plainly. For a high earner, the whole catch-up is Roth, so only the twenty-four thousand five hundred dollar base stays pre-tax. So the base stays pre-tax, and the catch-up is a separate Roth lane. Two lanes, and the catch-up lane has to exist in your plan. I'm not going to guess at what it does to your tax bill. That depends on your situation. The question is only whether the lane is there. And timing? You might wonder if this is still being sorted out. Mercer says the final regulations apply starting in twenty twenty-seven with good faith compliance until then. So twenty twenty-six is the warm-up. Next year is the real thing. Which means the plan you're sitting in now is about to be held to the final rules. So the catch-up isn't just a bigger number. For some people, it decides which account type they need before the first paycheck. Let me say who this does not touch, so nobody panics. If you're under fifty, the catch-up rule isn't about you. If your prior-year box-three wages aren't over the line, you keep the choice where your plan allows. Picture two coworkers who are both over fifty. One has last year's box-three number over the line, and one doesn't. Same age, same plan, different lane. The W-2 is what tells them apart, which is why I keep sending you there. And if you are covered, the first question isn't about taxes. It's a yes or no. Does my plan list a Roth option? That's a quick answer from your plan's website or your plan administrator. Yes or no? That's the whole screen. Now put it together into one checklist you can finish in ten minutes. Okay, the checklist. Step one, divide the limit by your pay periods. Set that percentage, and the base is finished. Step two is only for some of you. If you're fifty or older, pull out last year's W-2 and find box three. Check that number against the Roth rule. If it applies to you, open your plans page and confirm Roth is listed. If it's there, you're done. If it isn't, send your plan administrator one email today. Ask whether a Roth option is coming. One sentence is enough. If you're under fifty, skip step two entirely. Your list ends after the percentage. Add it up. A percentage field, a W-2 box, and maybe one email. Ten minutes, and you can do it on a lunch break with a sandwich in your other hand. Nothing else on this list needs doing. No table, no spreadsheet, no guessing at tax bills. If it isn't on the list, it can wait. Here's what I'd like you to take from this. You made a money decision. Most people spend January meaning to, and then it's March. You skipped that. That counts as a win, so take it. Then go do something more fun than payroll settings. If this helped, subscribe so the next one shows up on its own. And if you've got a money choice you keep putting off, drop it in the reviews. Tell us what stuck. We'll pick one and help you make the call.