Mandatory 401(k) Roth Catch-up Details Confirmed by IRS January 2025
IRS Issues Guidance on Mandatory 401(k) Roth Catch-up Starting in 2026
Starting January 1, 2026, high-income earners will face a significant shift in retirement savings rules due to the new Mandatory Roth Catch-Up Contribution requirement. If you earn more than $145,000 annually (indexed for inflation), your catch-up contributions to 401(k), 403(b), or 457 plans will now go directly to Roth, rather than pre-tax.
The IRS just released guidance in January 2025 regarding how the new mandatory Roth catch-up provisions will work for high-income earners. This article dives into everything you need to know!
On January 10, 2025, the IRS issued proposed regulations that provided much-needed clarification on the details associated with the Mandatory Roth Catch-up Contribution rule for high-income earners that are set to take effect on January 1, 2026. Employers, payroll companies, and 401(k) providers alike will undoubtedly be scrambling for the remainder of 2025 to get their systems ready for this restriction that will be placed on 401(k) plans starting in 2026.
This is a major change within 401(k) plans, and it is not a welcome change for high-income earners, since individuals in high tax brackets typically like to defer as much as they can pre-tax into 401(k), 403(b), and 457 plans to reduce their current tax liability. Here’s a quick list of the items that will be covered in this article:
General overview of new mandatory 401(k) Roth Catch-up Requirement
Income threshold for employees that will be impacted by the new rule
Definition of “wages” for purposes of the income threshold
Will it apply to Simple IRA plans as well?
“First year of employment” exception for the new Roth rule
Will a 401(k) plan be required to adopt Roth deferrals prior to 1/1/26?
401(k) Mandatory Roth Catch-up Contributions
When an employee reaches age 50, they can make an additional employee deferral called a catch-up contribution. Prior to 2026, all employees were allowed to select whether they wanted to make their catch-up contributions in pre-tax, Roth, or a combination of both. Starting in 2026, the freedom of choice will be taken away from W-2 employees that have more than $145,000 in wages in the prior calendar year (indexed for inflation).
Employees that are above the $145,000 threshold for the previous calendar year, are with the SAME employer, and are age 50 or older, will not be given the option to make their catch-up in pre-tax dollars. If an employee over this wage threshold wishes to make a catch-up contribution to their qualified retirement plan (401K, 403b, 457b), they will only be given the Roth deferral option.
Definition of Wages
One of the big questions that surfaced when the Secure Act 2.0 regulations were first released regarding the mandatory Roth catch-up contribution was the definition of “wages” for the purpose of the $145,000 income threshold. The IRS confirmed in their new regulation that only wages subject to FICA tax would count towards the $145,000 threshold. This is good news for self-employed individuals such as sole proprietors and partnerships that have earnings that are more than the $145,000 threshold, but do not receive W-2 wage, allowing them to continue to make their catch-up contributions all pre-tax for years 2026+.
So essentially, you could have partners of a law firm making $500,000+, and they would be able to continue to make catch-up contributions all pre-tax, but the firm could have a W-2 attorney on their staff that makes $180,000 in wages, and that individual would be forced to make their catch-up contributions all in Roth dollars and pay income tax on those amounts.
Will Mandatory Roth Catch-up Apply to Simple IRA Plans?
Many small employers sponsor Simple IRA plans, which also allow employees aged 50 or older to make pre-tax catch-up contributions, but at lower dollar limits. Fortunately, Simple IRA plans have been granted a pass by the IRS when it comes to the new mandatory Roth catch-up contributions. All employees that are covered by a Simple IRA plan, regardless of their wages, will be allowed to continue to make their catch-up contributions, all pre-tax, for tax years 2026+.
First Year of Employment Exception
Since the $145,000 wage threshold is based on an employee’s “prior year” wages, the IRS confirmed in the new regulations that an employer is allowed to give employees a pass on making pre-tax catch-up contributions during the first calendar year that the company employs them. Meaning, if Sue is hired by Company ABC in February of 2025 and makes $250,000 from February – December in 2025, she would be allowed to contribute her 401(k) catch-up contributions all pre-tax if she is over 50 years old, since Sue doesn’t have wages with Company ABC in 2024, even though her wages for the 2025 were over the $145,000 threshold.
Some High-Income Employees Will Get A 2-Year Pass
There are also situations where new employees with wages over $145,000 will get a 2-year pass on the application of the mandatory Roth catch-up rule. Let’s say Tim is hired by a law firm as a W-2 employee on July 1, 2025, at an annual salary of $200,000. Tim automatically gets a pass for 2025 for the mandatory Roth catch-up, because he did not have wages in 2024 with that company. However, between July 1, 2025 – December 31, 2025, he will only earn half his salary ($100,000), so when they look at Tim’s W-2 wages for purposes of the mandatory Roth catch-up in 2026, his 2025 W-2 will only be showing $100,000, allowing him to make his catch-up contribution all pre-tax in both 2025 and 2026.
Will 401(k) Plans Be Forced to Adopt Roth Deferrals
Not all 401(k) or 403(b) plans allow employees to make Roth employee deferrals. Roth deferrals have historically been an optional provision within an employer-sponsored retirement plan that a company had to voluntarily adopt. When the regulations for the new mandatory Roth catch-up were first released, the regulations seemed to state that if a plan did not allow Roth deferrals, NO EMPLOYEES, regardless of their wage level, were allowed to make catch-up contributions to the plan.
In the proposed regulations that the IRS just released, the IRS clarified that if a retirement plan does not allow Roth deferrals, only the employees above the $145,000 wage threshold would be precluded from making contributions. Employees below the $145,000 wage threshold would still be able to make catch-up contributions pre-tax, even without the Roth deferral feature in the plan.
Due to this restriction, it is expected that if a plan did not previously allow Roth deferrals, many plans will elect to adopt a Roth deferral option by January 1, 2026, to avoid this restriction on their employees with wages in excess of $145,000 (indexed for inflation).
For more information on this new Mandatory Roth Catch-Up Contribution effective 2026, please see our article: https://www.greenbushfinancial.com/all-blogs/roth-catch-up-contributions-high-wage-earners-secure-act-2
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Self-Employment Income In Retirement? Use a Solo(k) Plan To Build Wealth
It’s becoming more common for retirees to take on small self-employment gigs in retirement to generate some additional income and to stay mentally active and engaged. But, it should not be overlooked that this is a tremendous wealth-building opportunity if you know the right strategies. There are many, but in this article, we will focus on the “Solo(k) strategy
Self-Employment Income In Retirement? Use a Solo(k) Plan To Build Wealth
It’s becoming more common for retirees to take on small self-employment gigs in retirement to generate some additional income and to stay mentally active and engaged. But, it should not be overlooked that this is a tremendous wealth-building opportunity if you know the right strategies. There are many, but in this article, we will focus on the “Solo(k) strategy.”
What Is A Solo(K)
A Solo(k) plan is an employer-sponsored retirement plan that is only allowed to be sponsored by owner-only entities. It works just like a 401(k) plan through a company but without the high costs or administrative hassles. The owner of the business is allowed to make both employee deferrals and employer contributions to the plan.
Solo(k) Deferral Limits
For 2023, a business owner is allowed to contribute employee deferrals up to a maximum of the LESSER of:
100% of compensation; or
$30,000 (Assuming the business owner is age 50+)
Pre-tax vs. Roth Deferrals
Like a regular 401(K) plan, the business owner can contribute those employee deferrals as all pre-tax, all Roth, or some combination of the two. Herein lies the ample wealth-building opportunity. Roth assets can be an effective wealth accumulation tool. Like Roth IRA contributions, Roth Solo(k) Employee Deferrals accumulate tax deferred, and you pay NO TAX on the earnings when you withdraw them as long as the account owner is over 59½ and the Roth account has been in place for more than five years.
Also, unlike Roth IRA contributions, there are no income limitations for making Roth Solo(k) Employee Deferrals and the contribution limits are higher. If a business owner has at least $30,000 in compensation (net profit) from the business, they could contribute the entire $30,000 all Roth to the Solo(K) plan. A Roth IRA would have limited them to the max contribution of $7,500 and they would have been excluded from making that contribution if their income was above the 2023 threshold.
A quick note, you don’t necessarily need $30,000 in net income for this strategy to work; even if you have $18,000 in net income, you can make an $18,000 Roth contribution to your Solo(K) plan for that year. The gem to this strategy is that you are beginning to build this war chest of Roth dollars, which has the following tax advantages down the road……
Tax-Free Accumulation and Withdrawal: If you can contribute $100,000 to your Roth Solo(k) employee deferral source by the time you are 70, if you achieve a 6% rate of return at 80, you have $189,000 in that account, and the $89,000 in earnings are all tax-free upon withdrawal.
No RMDs: You can roll over your Roth Solo(K) deferrals into a Roth IRA, and the beautiful thing about Roth IRAs are no required minimum distributions (RMD) at age 72. Pre-tax retirement accounts like Traditional IRAs and 401(k) accounts require you to begin taking RMDs at age 72, which are forced taxable events; by having more money in a Roth IRA, those assets continue to build.
Tax-Free To Beneficiaries: When you pass assets on to your beneficiaries, the most beneficial assets to inherit are often a Roth IRA or Roth Solo(k) account. When they changed the rules for non-spouse beneficiaries, they must deplete IRAs and retirement accounts within ten years. With pre-tax retirement accounts, this becomes problematic because they have to realize taxable income on those potentially more significant distributions. With Roth assets, not only is there no tax on the distributions, but the beneficiary can allow that Roth account to grow for another ten years after you pass and withdraw all the earnings tax and penalty-free.
Why Not Make Pre-Tax Deferrals?
It's common for these self-employed retirees to have never made a Roth contribution to retirement accounts, mainly because, during their working years, they were in high tax brackets, which warranted pre-tax contributions to lower their liability. But now that they are retired and potentially showing less income, they may already be in a lower tax bracket, so making pre-tax contributions, only to pay tax on both the contributions and the earnings later, may be less advantageous. For the reasons I mentioned above, it may be worth foregoing the tax deduction associated with pre-tax contributions and selecting the long-term benefits associated with the Roth contributions within the Solo(k) Plan.
Now there are situations where one spouse retires and has a small amount of self-employment income while the other spouse is still employed. In those situations, if they file a joint tax return, their overall income limit may still be high, which could warrant making pre-tax contributions to the Solo(k) plan instead of Roth contributions. The beauty of these Solo(k) plans is that it’s entirely up to the business owner what source they want to contribute to from year to year. For example, this year, they could contribute 100% pre-tax, and then the following year, they could contribute 100% Roth.
Solo(k) versus SEP IRA
Because this question comes up frequently, let's do a quick walkthrough of the difference between a Solo(k) and a SEP IRA. A SEP IRA is also a popular type of retirement plan for self-employed individuals; however, SEP IRAs do not allow Roth contributions, and SEP IRAs limit contributions to 20% of the business owner’s net earned income. Solo(K) plans have a Roth contribution source, and the contributions are broken into two components, an employee deferral and an employer profit sharing.
As we looked at earlier, the employee deferral portion can be 100% of compensation up to the Solo(K) deferral limit of the year, but in addition to that amount, the business owner can also contribute 20% of their net earned income in the form of a profit sharing contribution.
When comparing the two, in most cases, the Solo(K) plan allows business owners to make larger contributions in a given year and opens up the Roth source.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
