A tax planning expert advises that high-income taxpayers aged 50 and above should view the upcoming mandatory Roth catch-up contribution rule not as a detriment, but rather as a strategic opportunity to optimize short- and long-term retirement strategies.
With the rule set to take effect January 1, 2026, Senior Vice President and Director of Tax Planning for The Northern Trust Institute Jane Ditelberg advises that taxpayers should begin planning now to take advantage of the long-term benefits while employers update their payroll systems.
Background
Section 603 of the SECURE 2.0 Act of 2022 (P.L. 117-328) requires participants in IRC § 401(k), IRC § 403(b), and governmental IRC § 457(b) plans with prior-year FICA wages exceeding $145,000 (indexed for inflation) to make their catch-up contributions as after-tax Roth contributions. This mandate effectively eliminates the option for these high-earners to make pre-tax catch-up contributions.
In a traditional 401(k), contributions are made before taxes, lowering a participant’s current taxable income, but withdrawals in retirement are taxed as ordinary income. Conversely, in a Roth account, contributions are made with money that has already been taxed, therefore there is no upfront tax deduction.
The primary benefit is that qualified distributions in retirement — including both the contributions and all the investment earnings — are tax-free.
Originally set to begin in 2024, the provision’s administrative complexity prompted the IRS to issue Notice 2023-62, which announced a two-year administrative transition period, delaying the mandate until taxable years beginning after December 31, 2025.
Final regulations issued in September confirm this timeline, so the mandatory Roth catch-up rule for taxpayers will now officially begin in 2026. The final regulations themselves, which provide the detailed operating rules for employers, will generally apply to taxable years beginning after December 31, 2026.
Taxpayer Opportunities
While the rule change sounds like a “detriment to those people, because they have to pay tax on the money before it goes in,” Ditelberg explained that the reality is more nuanced and presents a unique financial planning opening. “The taxpayers subject to an income threshold right now are not permitted to contribute directly to a Roth account, so, paradoxically, this is giving them an opportunity to save in a Roth account that they might not otherwise have,” she said.
Ditelberg emphasized that this presents a valuable chance for “tax diversification.” By having some retirement funds that are taxed now (Roth) and some that are taxed later (traditional), taxpayers can hedge against uncertainty about future tax rates. This strategy is particularly valuable when taxpayers are unsure if their tax bracket will be higher or lower in retirement.
According to Ditelberg, a key benefit of the Roth account is that both the contributions and the earnings can be withdrawn tax-free in retirement, provided certain conditions are met. Furthermore, she noted that Roth IRAs are not subject to required minimum distributions during the original owner’s lifetime, making them a powerful tool for wealth transfer, as the funds can continue to grow tax-free and be passed on to beneficiaries.
Also worth incorporating into planning is the five-year rule. “The account has to be open for five years before you can get the benefits of not paying tax on the earnings,” Ditelberg said. This period begins upon the first contribution to any Roth account for that individual.
For a 65-year-old planning to retire next year, making a Roth contribution may not be ideal if they need to access the earnings within that five-year window. For a 50-year-old, however, starting Roth contributions now would ensure the five-year holding period is met before retirement.
Employer Responsibilities
But the “bigger headache,” according to Ditelberg, is for the plan administrators and employers who must implement the changes. “That is the reason behind the two-year administrative transition period,” she said, “because this is a bigger change on the employer side.”
The challenge lies in programming payroll systems to identify employees who earned more than the FICA wage threshold in the prior year and then automatically treating their catch-up contributions as Roth contributions. This requires a new layer of logic that most systems were not necessarily built to handle.
The final regulations permit a plan administrator to aggregate wages from certain separate but related common law employers when determining if an employee’s wages exceed the threshold. They also introduce two new methods for correcting a failure where a pre-tax catch-up contribution was mistakenly accepted: 1) a Form W-2 correction method for errors caught before the form is filed, and 2) an in-plan Roth rollover for errors caught later.
Despite this relief, the fundamental challenge remains. Employers must update their systems and, in many cases, amend their plan documents. Ditelberg commented that the process is complex and time-consuming, especially when nearly every plan in the country may need some form of amendment.
“Employers need to be looking … at their 401k plan documents and their election forms, as well as communications with their employees,” Ditelberg concluded.
For more on catch-up contributions for individuals above age 50, see Checkpoint’s Federal Tax Coordinator 2d ¶ H-9240.1.
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