SECURE 2.0 Roth Catch-Up Rule Changes 401(k) Planning Starting 2026

The SECURE 2.0 Act introduces a significant change affecting Roth catch-up contributions for employees aged 50 and older participating in 401(k), 403(b), and governmental 457(b) plans, effective January 1, 2026. Starting then, employees who earn above a threshold salary of $145,000 (potentially increasing with cost-of-living adjustments) must make catch-up contributions exclusively to Roth accounts, using after-tax dollars. This eliminates the option for pretax catch-up contributions for these high earners, which may increase their effective and marginal tax rates. Employees earning below this threshold can continue choosing between pretax and Roth contributions, if their plans offer Roth options. Employers are required to make a reasonable, good-faith effort to implement the new Roth catch-up rule until final regulations are issued, which will impact payroll systems and compliance processes. The rule specifically excludes SIMPLE IRA plans and only applies to those with wages subject to Social Security taxes, leaving out employees without FICA wages, partners with self-employment income, sole proprietors, and certain government employees. This regulatory change also presents a strategic planning opportunity for financial advisors and employers. Highly compensated employees who previously relied on pretax catch-up contributions for tax planning might consider nonqualified deferred compensation (NQDC) plans to maintain pretax deferral benefits. Although NQDC plans are unfunded and subject to creditors' claims, they can offer tax deferral advantages for select groups within an organization, especially if their existing retirement plans do not provide Roth options. The shift to mandatory Roth catch-up contributions affects tax diversification strategies, necessitating adjustments in financial and retirement planning for affected employees. While Roth contributions offer tax-free withdrawals in retirement, the foregone immediate tax deductions require careful consideration. Due to the complexity and tax implications, affected employees are advised to consult with tax and legal professionals to tailor optimal retirement strategies. Overall, SECURE 2.0's Roth catch-up provision underscores evolving regulatory influences on retirement savings options, emphasizing the importance of compliance adaptability for employers and proactive planning for high-income employees. This change may alter employer plan designs and highlight the value of supplemental deferred compensation arrangements to balance tax planning objectives in a changing legislative environment.