5 Key Takeaways: The New Roth Catch-Up Rules
- A Mandatory Shift to Roth: Starting in 2026, if your FICA wages (Box 3 of your W-2) exceeded $145,000 (indexed for inflation) in the prior year, any catch-up contributions you make must be designated as Roth contributions.
- No Upfront Tax Deduction: This change removes the option for high earners to get a pre-tax deduction on their catch-up contributions, meaning you will pay taxes on that income now instead of in retirement.
- The Benefit of Tax-Free Growth: The trade-off for paying taxes now is that these catch-up contributions will grow tax-free and will be completely tax-free upon qualified withdrawal in retirement.
- A "Super Catch-Up" for Some: For those ages 60 to 63, the new regulations clarify an increased catch-up limit of 150% of the standard amount, offering a powerful opportunity for high-earning individuals to maximize their savings.
- Strategic Planning is Essential: This is not a passive change. It requires a proactive review of your financial plan to understand how this mandatory Roth bucket fits into your overall tax strategy for both the accumulation and distribution phases of retirement.
Understanding the Core Change: The Roth Catch-Up Requirement
Under previous law, participants aged 50 or older could make additional "catch-up" contributions to their 401(k), 403(b), or eligible governmental 457(b) plans on a pre-tax basis. This meant you got a tax deduction on the contribution now and would pay taxes on the withdrawals in retirement.
The new regulations, however, introduce a mandatory Roth contribution for catch-up-eligible participants who meet a specific income threshold. Starting in 2026, if your FICA wages (as reported in Box 3 of your W-2) from the employer sponsoring the plan exceeded $145,000 (this number is indexed for inflation) in the preceding calendar year, any catch-up contributions you make must be designated Roth contributions.
This means:
- You can still contribute more than the standard limit once you turn 50.
- But for those over the income threshold, those specific additional contributions will be made on an after-tax basis.
- You will not receive an upfront tax deduction for that catch-up amount.
- The money will grow tax-free, and qualified withdrawals in retirement will be completely tax-free.
This rule applies on an employer-by-employer basis. For example, if you earned $200,000 from one employer and $100,000 from another (with separate plans), the Roth catch-up requirement would only apply to the catch-up contributions made to the plan of the employer from whom you earned over the wage threshold.
How This Affects High-Earning Professionals and Executives
This change directly impacts your retirement planning strategy, especially if you're in the 45-60 age demographic. While the loss of a pre-tax deduction might seem like a drawback, it's essential to view this through a long-term lens.
- A Shift in Tax Strategy: High earners typically utilize pre-tax contributions to reduce their current tax liability, as they are often in a high marginal tax bracket. The new rule removes this option for a portion of your retirement savings. The key now is to strategically evaluate the trade-off: paying taxes now while you're still in a high tax bracket versus the benefit of tax-free growth and withdrawals in retirement, when your RMDs and other income sources might keep you in a similar or even higher tax bracket.
- Increased Focus on Roth Conversions: The new rule makes the Roth bucket of your retirement assets more substantial by default. This change underscores the value of tax diversification and reinforces a key principle of advanced financial planning: giving yourself options. You will now have a mix of pre-tax and Roth assets to draw from in retirement, which provides flexibility in managing your taxable income from year to year.
- New Limits for "Super Catch-Up" Contributions: The regulations also provide clarity on the increased catch-up limits introduced by SECURE 2.0. For participants ages 60-63, the catch-up limit increases to 150% of the standard limit. This is a powerful tool for those in their final years of peak earning who are looking to make a big final push for retirement savings. The Roth catch-up requirement would also apply to these "super catch-up" contributions for high-income earners.
- Planning for Payroll and Plan Changes: While the official applicability date is 2026, this is not something you should wait to address. You should proactively speak with your plan administrator and payroll department to understand how they plan to implement these changes. It's crucial to ensure your plan is set up to handle the new rules correctly to avoid any administrative errors that could affect your contributions.
Conclusion: Beyond the Rules—Crafting Your Retirement Strategy
In summary, the new IRS regulations are far more than a technical change; they are a direct call for a renewed focus on your long-term retirement tax strategy. While the ability to make pre-tax catch-up contributions is being limited for high earners, the opportunity to secure a substantial portion of your retirement savings in a tax-free Roth account is a valuable strategic trade.
This shift highlights a crucial point: financial planning in your peak earning years is not about following a simple checklist. It’s about anticipating changes like these and proactively positioning your wealth for long-term tax efficiency and flexibility. The complexities of new tax laws, especially when combined with executive compensation, equity awards, or business ownership, require a sophisticated and integrated approach.
Don't leave your retirement to chance or a "wait and see" approach. The decisions you make now will have a compounding effect for decades. At Purpose Built, we specialize in helping high-income professionals and executives navigate these exact complexities. We can help you analyze the new Roth catch-up rules within the context of your unique financial picture, model how different contribution strategies will impact your lifetime tax burden, and ensure your retirement plan is optimized for the new rules.
Don't wait until 2026 to build your strategy. Contact Purpose Built today to explore how you can turn these new rules into a powerful advantage for your financial future.
Frequently Asked Questions (FAQ)
Q: Who is affected by this new Roth catch-up rule?
A: This rule specifically applies to individuals who are age 50 or older and whose FICA wages from the employer sponsoring the plan exceeded $145,000 in the preceding calendar year. It affects high-income professionals and executives who were previously able to use pre-tax catch-up contributions to lower their current tax bill.
Q: Why is this change happening?
A: This rule is part of the SECURE 2.0 Act of 2022. The new regulations clarify its implementation and set the firm applicability date. The change aims to increase retirement savings in Roth accounts, which can lead to a more diversified tax picture in retirement.
Q: Does this rule apply to all retirement plans?
A: The rule applies to 401(k), 403(b), and eligible governmental 457(b) plans. It does not apply to SEP or SIMPLE IRA plans.
Q: What if my income fluctuates? Is it based on my total income for the year?
A: The rule is based on a specific income metric: your FICA wages (Box 3 of your W-2) for the preceding calendar year from the employer who sponsors your plan. If your income dips below the $145,000 threshold in a given year, the mandatory Roth catch-up rule would not apply to your contributions in the following year.
Q: Does this change eliminate pre-tax catch-up contributions for everyone?
A: No, the pre-tax catch-up contribution option is still available for those who do not meet the FICA wage threshold in the preceding calendar year.
Q: How can I prepare for this change now, even though it doesn't take effect until 2026?
A: The best way to prepare is to integrate this new reality into your financial plan. Speak with your financial advisor to model different scenarios, review your current tax strategy, and ensure your payroll and plan administrator are prepared to handle the new rules correctly to avoid any administrative errors.
Final Thoughts: Beyond the Rules—Crafting Your Retirement Strategy
The new IRS regulations significantly alter retirement savings for high-income professionals. While pre-tax catch-up contributions are limited for some, this mandates a shift to Roth accounts, offering valuable tax-free growth.
Effective planning is crucial; don't wait until 2026 to strategize. Contact Purpose Built today to optimize your financial future under these new rules.
About the Author
Sean Lovison, CPA, CFP®, is a fee-only financial planner based in Moorestown, New Jersey, serving clients virtually nationwide. After spending 14 years as a corporate chief financial officer (CFO), receiving and designing compensation plans, he decided to help others navigate their plans.
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