A new rule that has garnered attention recently just went into effect beginning in 2026 – the employer sponsored retirement plan catch up contributions required as Roth, or after-tax funds, for eligible participants. This originates from the SECURE 2.0 Act that was signed into law in 2022. The public was allowed a two-year transition period post signing of the law, but 2026 is the first taxable year in which compliance is mandatory for the rule.
The basics of the rule impact eligible retirement plan participants who are age 50 and older and have FICA wages of $150,000 and over from the previous year for the same employer. That means these employees must have their catch-up contributions as Roth or after-tax dollars. The catch up limits for 2026 are $8,000 for ages 50-59 and over 64, and $11,250 for ages 60-63. That is potentially a chunk of money that has changed its tax classification for the new year. The biggest impact on this rule change is the Roth or after-tax money will be added to the participants income and taxed, eliminating the income tax deduction they were accustomed to.
On a positive note, the participants will have access to saving in a Roth vehicle if they did not have access prior. They receive the benefits of diversification in the different tax treatment of their investment accounts. They also receive the benefit of a Roth account for tax deferred earnings on the investments and potentially tax-free distributions when withdrawing from the Roth account.
In the end, the decision for participants to continue their catch up contributions in the Roth vehicle comes down to cash flow. Each participant may have different cash flow situations, some may have depended on the income tax deduction provided by the catch up contributions, others may have plenty of flexibility and are delighted by the addition of the Roth account.
If you, a colleague, or anyone you know would like more information on the impact to your financial plan, please contact your designated Napier Financial planner for assistance.
