One door closes, another door opens

Under the SECURE 2.0 Act, a change regarding Roth catch-up contributions will have an impact on both employers and employees participating in 401(k), 403(b) and governmental 457(b) plans, primarily starting in 2026. The rule does not apply to SIMPLE IRA plans. This will also open a planning opportunity for advisors.

Beginning Jan. 1, 2026, employers must make a reasonable, good-faith interpretation of the rule to implement the Roth catch-up requirement until compliance with the final regulation. There will be mandatory Roth catch-up on employees who are aged 50 and older and earn more than $145,000, at the time of this writing. It would also appear that with cost-of-living adjustments, this may increase to $150,000, but we will not know that until the IRS announces all cost-of-living adjustments to retirement plans. This will impact those individuals making current pretax catch-up deferrals and those wishing to make catch-up contributions. Financial plans may need to be altered.

This means these catch-up contributions will be made using after-tax dollars, reducing the immediate tax deduction but allowing tax-free withdrawals in retirement. Employees earning below the threshold can continue to choose between pretax and Roth catch-up contributions if their plan offers a Roth option. The standard catch-up contribution limit for employees 50 or older is $7,500. There’s an enhanced catch-up contribution of $11,250 for those aged 60 to 63, but this reverts to $7,500 at age 64. Employees must understand these rules and plan their retirement contributions accordingly; this is especially true for high earners who will be subject to the mandatory Roth catch-up.

It is also important to note this only impacts those with wages for purposes of Social Security taxation. This amount is reported in Box 3 of Form W-2. Those who do not have FICA wages, partners with self-employment income, sole proprietors, and employees of exempt state and local governments are not subject to the Roth catch-up rule.

The opportunity for advisors and high earners

Where is the opportunity? Those high earners who were using the pretax catch-up as a tax planning option will clearly be impacted, as their effective tax rate will likely increase as will their marginal tax rate. A solution for these individuals would be to offer a nonqualified deferred compensation arrangement, thereby securing the pretax nature of their compensation. This will be especially the case if their existing plan does not offer a Roth option.

A nonqualified option may be a solution to maintain the tax deferral for a select group of managers or highly compensated employees. Although unfunded and subject to the claims of the employers’ creditors, it could be a viable option for the group of employees who drive the employer’s profitability. This is clearly impacting on a tax diversification strategy and may alter current planning; adjustments may have to be made. 

While the benefits of tax-free income are good, the benefits and leverage of tax deductions are equally beneficial. Of course, all options regarding this solution must be weighed, and employees are strongly encouraged to work with their tax and legal counsel.  

Ernest J. Guerriero, CLU, ChFC, CEBS, CPCU, CPC, CMS, AIF, RICP, CPFA, national president of the Society of Financial Service Professionals, is the director of qualified plans, business markets for Consolidated Planning. He may be contacted at [email protected].