If you’re a high-earning employee age 50 or older, a critical change is coming to your workplace retirement plan that requires immediate attention. The SECURE 2.0 Act of 2022 introduced the Mandatory Roth Catch-Up Rule, and its effective date is rapidly approaching. Starting in 2026 (for taxable years beginning after December 31, 2025), a key tax-saving strategy for high earners will fundamentally change—and failing to adjust your plan could lead to significant financial setbacks, including higher taxes or loss of contribution opportunities.

Who is Affected by the Change?

This rule targets participants in 401(k), 403(b), and 457(b) plans who are age 50 or older and earned more than $145,000 in FICA wages (found in Box 3 of your W-2) from the employer sponsoring the plan in the prior calendar year. This $145,000 threshold will be indexed for inflation in future years.

The New Mandatory Roth Requirement

The main change is simple but profound: if you exceed this income threshold, any catch-up contributions you make must be designated as Roth (after-tax) contributions. Previously, high earners could contribute catch-up amounts on a traditional (pre-tax) basis, receiving an immediate tax deduction that reduced their taxable income for the current year. Moving forward, for the catch-up portion:

• No Upfront Deduction: You will no longer get an immediate tax deduction for the catch-up amount in the year you contribute it. This means your taxable income today will be higher than if you were making a pre-tax contribution.
• Tax-Free Retirement: A major benefit is that qualified withdrawals of both contributions and earnings in retirement will be tax-free.

You can still contribute up to the general annual limit on a pre-tax basis (traditional 401(k)), but the extra catch-up portion must be Roth-designated.

The Cost of Inaction: Penalties and Higher Taxes

Ignoring this change could directly impact your take-home pay and retirement savings strategy:

1. Lost Tax Deferral (Higher Current Taxes): The most immediate impact is the loss of your current-year tax deduction on the catch-up contribution. For example, if you are in a 32% tax bracket and contribute the $7,500 catch-up limit (for 2025) on a pre-tax basis, you save $2,400 in taxes today. Under the new rule, you lose that immediate tax break, increasing your current-year tax bill. This could be a part of a strategic long-term move for tax diversification, but it requires adjusting your current tax planning.
2. Loss of Catch-Up Contributions (Missed Savings Opportunity): This is the most serious consequence for many. If your employer’s 401(k), 403(b), or 457(b) plan does not offer a designated Roth contribution option, and you are a high earner subject to this rule, you may lose the ability to make any catch-up contributions to that plan once the rule takes effect in 2026.
3. • Example Scenario: Imagine you are 55, earning $180,000, and your employer’s plan only offers traditional (pre-tax) 401(k) contributions. Before 2026, you could contribute the full amount, including the pre-tax catch-up. Starting in 2026, because you’re a high earner, your catch-up contribution must be Roth. If your plan hasn’t been updated to offer a Roth option, you would be prohibited from making the catch-up contribution, potentially costing you thousands in missed tax-advantaged retirement savings every year. Employers who want to continue supporting catch-up contributions for high earners will need to ensure a Roth option is available.

3. Plan Correction Failures (Administrative Headaches and Potential Tax Issues): If a high-earning participant mistakenly makes a pre-tax catch-up contribution that was required to be Roth, there may be administrative issues, tax implications, and even penalties associated with over-contributing to a certain account.

While there are correction methods available (like an in-plan Roth rollover or W-2 correction), these are administrative burdens that can lead to complicated tax reporting and potential issues for the participant if not handled quickly and correctly.

What You Need to Do Now

Don’t wait for 2026 to find out your retirement plans are disrupted.

• Determine Your Status: Review your prior year’s FICA wages (W-2 Box 3) to see if you are near or above the $145,000 threshold.
• Check Your Plan: Contact your plan administrator or HR department immediately to confirm if your plan offers a designated Roth contribution option.
• Adjust Your Strategy: If you are affected, begin planning for the loss of the current-year tax deduction for your catch-up amount. For long-term tax diversification, mandatory Roth catch-ups are an opportunity—but they require intentional tax planning.

Take Action: Turn this potential road block into an opportunity! If you’re unsure how to adjust your financial strategy to comply with this new rule—whether your employer has changed it’s retirement benefits or not—reach out to us today and we’ll get started on a strategy tailored to your unique situation and goals.