Episode 78 – Boost your savings in 2026: New DCP contribution limits
Want to save more for retirement in 2026? In this episode, we break down the new Deferred Compensation Program (DCP) limits: $24,500 annually, or $32,500 if you’re age 50+ and even more if you’re within 3 years of retirement. Find out how pretax and Roth contributions work together – what counts toward the limit and what doesn’t – so you can make the most of your savings next year.
Episode transcript:
[music intro]
Jenny
Welcome back to Fund Your Future with DRS. Today we’re talking about the new limits for the Deferred Compensation Program. Every year the IRS generally increases those limits as to the amount of money that you can put into your account. And we’ve welcomed Ginny back to the program to talk about these wonderful benefits.
Ginny
Hi. Happy to be here.
Seth
Ginny, could you just remind our listeners — we talk about DCP a lot — just remind folks what DCP is.
Ginny
Sure. So, it’s an added retirement savings program. It’s called a 457(b). That’s the IRS designation. And it allows people to defer a portion of their salary using either pretax contributions, Roth or both. And unlike other retirement plans, there’s no IRS penalty for early withdrawal. You can withdraw from the account penalty free once you are separated from service, or even at 59 1/2 if you’re working.
Seth
My wife was just talking to… one of her coworkers, came up to her unsolicited and said, “hey, this DCP program seems like a pretty great thing, right?” And it is. There’s lots of great features. And Jenny, as you mentioned, the IRS changes these limits every year (kind of with inflation, I think is generally how they think about it) it increases by a certain amount. So, we have these limits. Does it matter if I’m contributing Roth or pretax money? How does that impact the limit?
Ginny
It doesn’t impact the limit. You could do one or the other. You can do both. But your combined contributions can’t exceed the limit.
Seth
And we should clarify, because I know this is a question that comes up a lot from people you mentioned when you’re talking about DCP; this is a 457 plan. And so, the limit applies to any 457 plan you’re contributing to. But if I’m contributing to a Roth IRA and that has a limit of $7,000. Something like that. Those are completely independent limits, question mark?
Ginny
Yes, they are. They’re completely separate. You could contribute the full amount to both of them. If you do one, not the other or some in one in some in the other one.
Seth
Yeah. And in different types of plans have different limits. And so important to think about if you’re contributing to a 403(b) or if you’re contributing to a 457 or a IRA, that those are completely separate limits. Just to keep that in mind.
Jenny
And just as a refresher, what are the new limits for 2026?
Ginny
So, the regular limit has increased by $1,000 to $24,500. And then for people who are turning 50 or older next year, in 2026, the limit has increased by $1,500 to $32,500. So the IRS allows that extra $8,000 as a catch-up for people who are 50 or older.
Jenny
Yeah, kind of putting in that extra money in those few years before retirement.
Seth
The idea if you if you missed out early, you have another chance to come back and get it. And then some people, maybe if they’re earning more, have more, they can contribute. As they’ve gotten older as well. So there’s sort of double the advantages there. What sort of money counts towards the limit that you’re putting it into these accounts?
Ginny
So your regular deferrals that come out of your paycheck, if you are doing a lump sum deferral, maybe you’re cashing out some leave and deferring that into DCP. That counts towards your annual limit. If your employer if you’re lucky enough to have an employer who does matching or does DCP contributions on your behalf, that does count toward the limit.
And then if you’re contributing to a separate 457(b), maybe you changed employers or your employer offers more than one. The limit applies to your total 457(b) contributions for the year.
Seth
So let me just walk through a possible example. I work at DRS for half of the year. I’m contributing to my 457 account and then I go work for the city of Olympia. They don’t participate in DCP, but they’ve got their own 457 account. My limit is combined between my time at DRS and my time at the city of Olympia. I can’t exceed the annual contributions even though I’m contributing to different plans.
Ginny
Exactly.
Seth
But they’re under the same IRS qualification. Right. And then we should probably also clarify what doesn’t count towards, because when you were listing off all those things like, yeah, everything, everything that you put in the account counts. But there are there are a few things that don’t count towards your limit.
Ginny
Right? So if you’re rolling funds into DCP, maybe you have, an account from a former employer or you’re wanting to consolidate the rollover dollars do not count towards the limit. And then, just like we talked about before, if you’re contributing to an IRA or a 403(b), those are separate. And so those contributions don’t count toward the limit.
Jenny
Yeah. Or the same too, right? If I’m rolling it over from pretax to Roth it’s still within my DCP account. That obviously doesn’t count towards the limit.
Ginny
Yes. Right.
Seth
So I think the thing that’s important for people to remember is these are annual limits. So if you’re going to stop work halfway through the year or you’ve started work halfway through the year, you still have the same limit. Even though you’re working fewer months. But I think what a lot of people like to think about is how much is going to come out of my paycheck, or how much can I contribute every paycheck, or how much can I contribute every month?
So, could you just let us know what the monthly amount would be? If I’m trying to spread it out evenly over the course of a full 12 months?
Ginny
Right. So, if you’re just under 50, then and you want to, as you said, spread it out evenly throughout the year, the contribution rate would be $2,041 a month. And then for people who are 50 plus, it would be $2,708 a month.
Seth
So if I’m under 50 and I get paid twice a month, I can contribute about $1,020 per paycheck. One of the things that’s important, oftentimes folks who participate in our retirement plans only think about state employees. But we have city employees, county employees, school districts, and they’re on all sorts of different pay cycles.
Some people are getting paid once a month. Some people are getting paid once a week, some people are getting paid every other week. So those amounts could vary per paycheck based on how many checks you’re getting.
Ginny
Right. And you don’t have to do the same amount each month. So, say you know you’re going to be leaving in June. Maybe you want to do double that amount so you max out for the year.
Seth
I know we have some employees that try to like max it out as early as they can in the year. There’s a there’s a thought that you get the money invested sooner. It has longer to grow. And so people that have, I would say, more flexibility in their budget. Sometimes we’ll hit the limit in April or May, as they’re trying to plug in as much money as they can, and then they stop contributing for the rest of the year because they’ve already hit that limit.
Ginny
Or if it’s later in the year, then they have a little extra cash in hand for the holidays.
Seth
Oh, that’s a good idea as well. Or folks who might not have regular payments, they work a lot more in one season or the other, or they have commission based or some other type of payment that they’re receiving.
Jenny
We know that there’s a few new rules around some of these catch-up contributions. As part of the SECURE 2.0 Act, section 603, if you really want to get nitty gritty with the IRS pieces. But just in terms of folks who earn a high income and how they can contribute to their DCP, can you talk a little bit about that?
Ginny
Sure. So, starting in 2026, for people who earned $150,000 or more in FICA wages with their current employer in the previous year, so they earned those dollars in 2025, their age 50 plus catch-up contribution. So that extra $8,000 must be Roth. And as you said, that’s because of a change in law with the secure 2.0 act. So once people have contributed the regular annual limit, the 24,500 in pretax dollars. So, any contributions over that will automatically process as Roth.
Seth
Just to clarify or to reinforce because this is a new change and a lot of people who have traditionally participated in DCP are partially doing it for the tax benefit. So, people who may earn a higher income will lower their taxable income by contributing as much as they possibly can to DCP. As you were saying, for folks who in 2025 made more than $150,000, those higher extra catch-up contributions are going to be Roth.
The way I like to think about it is: the federal government is trying to get their money now instead of later. [That’s] one of the reasons that they’re pushing people to have to make Roth contributions.
So, I know one of the questions we get frequently is: if I want to go change my deferral amount, I know this new limit is coming into play or I’ve never thought about, hey, I’m pretty close to the maximum. Maybe I should bump up and get the maximum limit. How quickly will a change take effect? If I make it for my deferral?
Ginny
So, it really depends on your payroll cycle and when you request it within that payroll cycle. So generally within 30 days or 1 to 2 pay cycles.
Seth
Yeah. That goes back to what we were talking about earlier that some employees are getting paid twice a month. Some employees are getting paid once a month, some are getting paid every other week. So yeah, it’s really going to be depending on when you let us know. So then we can let your employer know. And then when can they make the change on your next paycheck.
Jenny
And then let’s say someone does want to make this change as to how much they’re deferring from their paycheck. How would they go about doing that?
Ginny
They can do that through their online account. Or they can contact our record keeper, Voya Financial, and make the change. There is an exception. If people are using the last three-year special catch up, they need to do that change with a form. So, they would need to contact DRS. We’ll send them a form that they need to fill out and return to us.
But people who are in that program have already completed that form. They already know about that.
Seth
For people who don’t know about the three-year catch up, can you just give a little bit of background on who qualifies, how you participate, what the limits are for that, because it is a more unique thing that not a lot of people participate in, partially because you have to contribute a lot of money into the plan to be able to qualify if you’re over these limits we’ve already been talking about.
Ginny
So, it’s available to people who are in their last three years before their normal retirement age. And that age is going to vary based on your retirement plan. But those last three years beforehand, if you didn’t contribute the full regular amount in your previous years, then you may be eligible to defer up to twice the regular annual limit for three consecutive years.
So, for the next year, that catch-up limit could be as high as $49,000. If people are interested in doing that, then they should contact us. We’ll do a review of their account, look at their previous deferral history, and we’ll look at whether they’re how close they are to the normal retirement age. It takes a couple of days, but we’ll get back to them and let them know if they qualify. And if they do, how much.
Seth
Yeah. So, it’s another opportunity if you if you feel like you need to add some more to your account because you missed some earlier on, but yeah, it’s quite a high limit. But that’s part of why it’s restricted on how many years you can use it.
Ginny
The new requirement for those high earners that their age 50 plus catch-up contributions need to be Roth. That requirement does not apply to the last three-year catch up. So, if you’re in those final three years and you want to do pretax, then you could also look into that program. You don’t have to do the full amount.
Seth
Yeah. So, if you are a high wage earner and you’re getting quite close to retirement and you want to make pretax contributions versus Roth contributions, looking at the three-year catch up is a good opportunity. And if you have questions about this, contact DRS and we’ll help walk you through what your options are.
Jenny
So yeah, this is obviously a great time for folks to go ahead and look at their DCP accounts, see how much you’ve been contributing, maybe in 2025, and maybe even consulting with a tax advisor to see about how you might want to change your contributions for the next year.
Seth
Yeah, the end of the year is always a good time to think about everything associated with your paycheck. I think we’ve talked about this on a previous episode of doing kind of an annual check in or twice a year check in, but how much are you having withheld for taxes? You know, open enrollment just happened with health insurance.
All of these things are changing at the start of the year, and you may have the opportunity to if you’re currently contributing a percentage to DCP, maybe it’s time to up it 1% or 2%. Or if you’re contributing a flat dollar amount, maybe you change it to a percentage or you increase the dollar amount. Or if you know something else, you’re sending a kid to college and you’re going to need more cash flow available.
Maybe you pause your DCP for the next year. It’s a good time to think about those different levers you can pull, and how to balance things within your own personal life situation. But these annual changes remind you to do that and go look at your contributions. And if you’re on track or if you want to make some changes.
Jenny
Absolutely.
Ginny
It’s also a good time to review your investment options if see if you want to make any changes to that.
Seth
That’s a really good point.
Jenny
Well thank you Ginny.
Ginny
Thank you.
Jenny
Thanks for coming in.
Ginny
My pleasure.
[music outro]
Disclaimer
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References to any specific product or entity do not constitute an endorsement or recommendation. The views expressed by guests are their own, and their appearance on the program does not imply an endorsement of them or any entity they represent. Views and opinions expressed by DRS employees are those of the employees and do not necessarily reflect the view of DRS or any of its officials.
