IRS Annual Limits 2026: '$24,500 Cap Won't Rescue Middle-Class Savings,' Experts Say

The Internal Revenue Service has announced that the annual 401(k) contribution limit will rise to £18,300 ($24,500) in 2026, up from £17,600 ($23,500) this year. While this increase, part of the IRS's annual cost-of-living adjustments, is welcome, experts warn it offers little relief for middle-class Americans struggling to save for retirement.

The increase, amounting to £750 ($1,000)—double the £375 ($500) rise seen in both 2024 and 2025—does little to address the broader savings crisis. Recent data shows most workers are unable to reach even the current limits, raising questions about whether higher caps benefit anyone beyond the wealthiest savers.

A System That Serves the Wealthiest

According to Vanguard's 2025 How America Saves report, only 14% of participants maxed out their 401(k) contributions in 2024. The study analysed more than 1,400 qualified plans and nearly 5 million participants, highlighting a significant disconnect between policy ambitions and actual savings behaviour among ordinary workers.

The median 401(k) balance in 2024 was just £28,626 ($38,176), compared with an average of £111,091 ($148,153). This discrepancy reflects how a small number of large accounts skew overall figures, while most savers struggle to build meaningful retirement funds.

Lisa Featherngill, national director of strategic wealth and business advisory at Comerica Wealth Management, said, 'The new 2026 retirement plan limits give people more room to save, which is especially helpful as retirement becomes longer and more expensive.' However, critics argue that increased contribution limits are meaningless if workers lack the financial capacity to contribute more.

Research published by the Harvard Law School Forum on Corporate Governance reveals that the top 10% of earners claim 60% of tax benefits related to retirement savings, with employer matching contributions disproportionately favouring higher earners. This underscores how the system often benefits those already well-positioned financially.

Middle-class Savers Falling Further Behind

The ongoing cost-of-living crisis has forced many American households to make difficult choices between immediate expenses and long-term security. A November 2025 Primerica report found that middle-income families are 'delaying contributions to retirement plans,' as essential costs remain more than 30% higher than in early 2021. These persistent expenses create 'long-term gaps that are difficult to close.'

Additionally, a Bankrate survey from August 2025 indicated that 58% of American workers believe they are behind on their retirement savings, with 37% feeling significantly behind. The modest increases to contribution limits in 2026 may do little to help those who are already struggling.

The limits for catch-up contributions for workers aged 50 and over will also rise to £6,000 ($8,000), up from £5,623 ($7,500) since 2023. Those aged 60 to 63 qualify for an enhanced 'super catch-up' of £8,435 ($11,250), unchanged from 2025. Yet, only 16% of eligible workers contributed catch-up funds in 2024, according to Vanguard data.

New Rules Add Complexity

The 2026 updates include provisions under the SECURE 2.0 Act. High earners—those earning more than £112,470 ($150,000) in the previous year—must now designate their catch-up contributions as Roth contributions, meaning after-tax savings rather than pre-tax deferrals.

Other notable changes involve raising the annual compensation limit to £270,000 ($360,000) and increasing defined contribution plan caps to £54,000 ($72,000). Health savings account (HSA) maximums also increased, with single coverage now at £3,300 ($4,400) and family coverage at £6,561 ($8,750).

The Growing Retirement Gap

According to Northwestern Mutual's 2025 Planning & Progress study, Americans believe they need approximately £945,000 ($1.26 million) to retire comfortably. Yet, one in four with retirement savings reports having only one year or less of their current annual income set aside.

Mark Hamrick, senior economic analyst at Bankrate, warns that insufficient personal savings combined with looming Social Security and Medicare shortfalls pose serious risks. 'The time-bomb is ticking,' he says, emphasising the urgent need for individuals and governments to act.

For middle-income families facing ongoing financial strain, the modest increase in contribution limits may not be enough to bridge the widening retirement savings gap. The IRS limits will take effect on 1 January 2026.