Mandatory Roth Catch-up Contributions for High Wage Earners - Secure Act 2.0
Starting in 2026, individuals that make over $145,000 in wages will no longer be able to make pre-tax catch-up contributions to their employer-sponsored retirement plan. Instead, they will be forced to make catch-up contributions in Roth dollars which means that they will no longer receive a tax deduction for those contributions.
Starting in 2026, individuals that make over $145,000 in wages will no longer be able to make pre-tax catch-up contributions to their employer-sponsored retirement plan. Instead, they will be forced to make catch-up contributions in Roth dollars which means that they will no longer receive a tax deduction for those contributions.
This, unfortunately, was not the only change that the IRS made to the catch-up contribution rules with the passing of the Secure Act 2.0 on December 23, 2022. Other changes will take effect in 2025 to further complicate what historically has been a very simple and straightforward component of saving for retirement.
Even though this change will not take effect until 2026, your wage for 2025 may determine whether or not you will qualify to make pre-tax catch-up contributions in the 2026 tax year. In addition, high wage earners may implement tax strategies in 2025, knowing that they are going to lose this sizable tax deduction in the 2024 tax year.
Effective Date Delayed Until 2026
Originally when the Secure Act 2.0 was passed, the Mandatory 401(K) Roth Catch-up was schedule to become effective in 2024. However, in August 2023, the IRS released a formal notice delaying the effective date until 2026. This was most likely a result of 401(k) service providers reaching out to the IRS requesting for the delay so the IRS has more time to provide much need additional guidance on this new rule as well as time for the 401(k) service providers to update their systems to comply with the new rules.
Before Secure Act 2.0
Before the Secure Act 2.0 was passed, the concept of making catch-up contributions to your employer-sponsored retirement account was very easy. If you were age 50 or older at any time during that tax year, you were able to contribute the maximum employee deferral amount for the year PLUS an additional catch-up contribution. For 2023, the annual contribution limits for the various types of employer-sponsored retirement plans that have employee deferrals are as follows:
401(k) / 403(b)
EE Deferral Limit: $22,500
Catch-up Limit: $7,500
Total $30,000
Simple IRA
EE Deferral Limit: $15,500
Catch-up Limit: $3,500
Total $19,000
You had the option to contribute the full amount, all Pre-tax, all Roth, or any combination of the two. It was more common for individuals to make their catch-up contributions with pre-tax dollars because normally, taxpayers are in their highest income earning years right before they retire, and they typically prefer to take that income off the table now and pay tax in it in retirement when their income is lower and subject to lower tax rates.
Mandatory Roth Catch-Up Contributions
Beginning in 2026, the catch-up contribution game is going to completely change for high wage earners. Starting in 2026, if you are age 50 or older, and you made more than $145,000 in WAGES in the PREVIOUS tax year with the SAME employer, you would be forced to make your catch-up contributions in ROTH dollars to your QUALIFIED retirement plan. I purposefully all capped a number of the words in that sentence, and I will now explain why.
Employees that have “Wages”
This catch-up contribution restriction only applies to individuals that have WAGES over $145,000 in the previous calendar year. Wages meaning W2. Since many self-employed individuals do not have “wages” (partners or sole proprietors) it would appear that they are not subject to this restriction and will be allowed to continue making pre-tax catch-up contribution regardless of their income.
On the surface, this probably seems unfair because you could have a W2 employee that makes $200,000 and they are forced to make their catch-up contribution to the Roth source but then you have a sole proprietor that also makes $200,000 but they can continue to make their catch-up contributions all pre-tax. Why would the IRS allow this?
The $145,000 income threshold is based on the individual’s wages in the PREVIOUS calendar year and it’s not uncommon for self-employed individuals to have no idea what their net income will be until their tax return is complete, which might not be until September or October of the following year.
Wages in the Previous Tax Year
For taxpayers that have wages, they will have to look back at their W2 from the previous calendar year to determine whether or not they will be eligible to make their catch-up contribution in pre-tax dollars for the current calendar year.
For example, it’s January 2026, Tim is 52 years old, and his W2 wages with his current employer were $160,000 in 2025. Since Jim’s wages were over the $145,000 threshold in 2025, if he wants to make the catch-up contribution to his retirement account in 2026, he would be forced to make those catch-up contributions to the Roth source in the plan so he would not receive a tax deduction for those contributions.
Wages With The Same Employer
When the Secure Act 2.0 mentions the $145,000 wage limit, it refers to wages in the previous calendar year from the “employer sponsoring the plan”. So it’s not based on your W2 income with any employer but rather your current employer. If you made $180,000 in W2 income in 2025 from XYZ Inc. but then you decide to switch jobs to ABC Inc. in 2026, since you did not have any wages from ABC Inc. in 2026, there are no wages with your current employer to assess the $145,000 threshold which would make you eligible to make your catch-up contributions all in pre-tax dollars to ABC Inc. 401(K) plan for 2026 even though your W2 wages with XYZ Inc. were over the $145,000 limit in 2025.
This would also be true for someone that is hired mid-year with a new employer. For example, Sarah is 54 and was hired by Software Inc. on July 1, 2026, with an annual salary of $180,000. Since Sarah had no wages from Software Inc. in 2025, she would be eligible to make her catch-up contribution all in pre-tax dollars. But it gets better for Sarah, she will also be able to make a pre-tax catch-up contribution in 2026 too. For the 2026 plan year, they look back at Sarah’s 2024 W2 to determine whether or not here wages were over the $145,000 threshold, since she only works for half of the year, her total wages were $90,000, which is below the $145,000 threshold.
If Sarah continues to work for Software Inc. into 2027, that would be the first year that she would be forced to make her catch-up contribution to the Roth source because she would have had a full year of wages in 2026, equaling $180,000.
$145,000 Wage Limit Indexed for Inflation
There is language in the new tax bill to index the $145,000 wage threshold for inflation meaning after 2024, it will most likely increase that wage threshold by small amount each year. So while I use the $145,000 in many of the examples, the wage threshold may be higher by the time we reach the 2026 effective date.
The Plan Must Allow Roth Contributions
Not all 401(k) plans allow employees to make Roth contributions to their plan. Roth deferrals are an optional feature that an employer can choose to either offer or not offer to their employees. However, with this new mandatory Roth catch-up rule for high wage earners, if the plan includes employees that are eligible to make catch-up contributions and who earned over $145,000 in the previous year, if the plan does not allow Roth contributions, it does not just block the high wage earning employees from making catch-up contributions, it blocks ALL employees in the plan from making catch-up contributions regardless of whether an employee made over or under the $145,000 wage threshold in the previous year.
Based on this restriction, I’m assuming you will see a lot of employer-sponsored qualified retirement plans that currently do not allow Roth contributions to amend their plans to allow these types of contributions starting in 2026 so all of the employees age 50 and older do not get shut out of making catch-up contributions.
Simple IRA Plans: No Mandatory Roth Catch-up
Good news for Simple IRA Plans, this new Roth Catch-up Restriction for high wage earners only applies to “qualified plans” (401(k), 403(b), and 457(b) plans), and Simple IRAs are not considered “qualified plans.” So employees that are covered by Simple IRA plans can make as much as they want in wages, and they will still be eligible to make catch-up contributions to their Simple IRA, all pre-tax.
That’s a big win for Simple IRA plans starting in 2026, on top of the fact that the Secure Act 2.0 will also allow employees covered by Simple IRA plans to make Roth Employee Deferrals beginning in 2025. Prior to the Secure Act 2.0, only pre-tax deferrals were allowed to be made to Simple IRA accounts.
Roth Contributions
A quick reminder on how Roth contributions work in retirement plans. Roth contributions are made with AFTER-TAX dollars, meaning you pay income tax on those contributions now, but all the investment returns made within the Roth source are withdrawn tax-free in retirement, as long as you are over the age of 59½, and the contributions have been in your retirement account for at least 5 years.
For example, you make a $7,000 Roth catch-up contribution today, over the next 10 years, let’s assume that $7,000 grows to $15,000, after reaching age 59½, you can withdraw the full $15,000 tax-free. This is different from traditional pre-tax contributions, where you take a tax deduction now for the $7,000, but then when you withdraw the $15,000 in retirement, you pay tax on ALL of it.
It’s So Complex Now
One of the most common questions that I receive is, “What is the maximum amount that I can contribute to my employer-sponsored plan?”
Prior to Secure Act 2.0, there were 3 questions to arrive at the answer:
What type of plan are you covered by?
How old are you?
What is your compensation for this year?
Starting in 2024, I will have to ask the following questions:
What type of plan are you covered by?
If it’s a qualified plan, do they allow Roth catch-up contributions?
How old are you?
Are you a W2 employee or self-employed?
Did you work for the same employer last year?
If yes, what were your total W2 wages last year?
What is your compensation/wage for this year? (max 100% of comp EE deferral rule limit)
While this list has become noticeably longer, in 2025, the Secure Act 2.0 will add additional complexity and questions to this list when the “Additional Catch-up Contributions for Ages 60 - 63” go into effect. We will cover that fun in another article.
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.
Secure Act 2.0: Roth Simple IRA Contributions Beginning in 2023
With the passage of the Secure Act 2.0, for the first time ever, starting in 2023, taxpayers will be allowed to make ROTH contributions to Simple IRAs. Prior to 2023, only pre-tax contributions were allowed to be made to Simple IRA plans.
With the passage of the Secure Act 2.0, for the first time ever, starting in 2023, taxpayers will be allowed to make ROTH contributions to Simple IRAs. Prior to 2023, only pre-tax contributions were allowed to be made to Simple IRA plans.
Roth Simple IRAs
So what happens when an employee walks in on January 3, 2023, and asks to start making Roth contributions to their Simple IRA? While the Secure Act 2.0 allows it, the actual ability to make Roth contributions to Simple IRAs may take more time for the following reasons:
The custodians that provide Simple IRA accounts to employees may need more time to create updated client agreements to include Roth language
Employers may need to decide if they want to allow Roth contributions to their plans and educate their employees on the new options
Employers will need to communicate to their payroll providers that there will be a new deduction source in payroll for these Roth contributions
Employees may need time to consult with their financial advisor, accountant, or plan representative to determine whether they should be making Roth or Pre-tax Contributions to their Simple IRA.
Mandatory or Optional?
Now that the law has passed, if a company sponsors a Simple IRA plan, are they required to offer the Roth contribution option to their employees? It’s not clear. If the Simple IRA Roth option follows the same path as its 401(k) counterpart, then it would be a voluntary election made by the employer to either allow or not allow Roth contributions to the plan.
For companies that sponsor Simple IRA plans, each year, the company is required to distribute Form 5304-Simple to the employees. This form provides employees with information on the following:
Eligibility requirements
Employer contributions
Vesting
Withdrawals and Rollovers
The IRS will most likely have to create an updated Form 5304-Simple for 2023, which includes the new Roth language. If the Roth election is voluntary, then the 5304-Simple form would most likely include a new section where the company that sponsors the plan would select “yes” or “no” to Roth employee deferrals. We will update this article once the answer is known.
Separate Simple IRA Roth Accounts?
Another big question that we have is whether or not employees that elect the Roth Simple IRA contributions will need to set up a separate account to receive them.
In the 401(k) world, plans have recordkeepers that track the various sources of contributions and the investment earnings associated with each source so the Pre-Tax and Roth contributions can be made to the same account. In the past, Simple IRAs have not required recordkeepers because the Simple IRA account consists of all pre-tax dollars.
Going forward, employees that elect to begin making Roth contributions to their Simple IRA, they may have to set up two separate accounts, one for their Roth balance and the other for their Pre-tax balance. Otherwise, the plans would need some form of recordkeeping services to keep track of the two separate sources of money within an employee’s Simple IRA account.
Simple IRA Contribution Limits
For 2023, the annual contribution limit for employee deferrals to a Simple IRA is the LESSER of:
100% of compensation; or
Under Age 50: $15,500
Age 50+: $19,000
These dollar limits are aggregate for all Pre-tax and Roth deferrals; in other words, you can’t contribute $15,500 in pre-tax deferrals and then an additional $15,500 in Roth deferrals. Similar to 401(k) plans, employees will most likely be able to contribute any combination of Pre-Tax and Roth deferrals up to the annual limit. For example, an employee under age 50 may be able to contribute $10,000 in pre-tax deferrals and $5,500 in Roth deferral to reach the $15,500 limit.
Employer Roth Contribution Option
The Secure Act 2.0 also included a provision that allows companies to give their employees the option to receive their EMPLOYER contributions in either Pre-tax or Roth dollars. However, this Roth employer contribution option is only available in “qualified retirement plans” such as 401(k), 403(b), and 457(b) plans. Since a Simple IRA is not a qualified plan, this Roth employer contribution option is not available.
Employee Attraction and Retention
After reading all of this, your first thought might be, what a mess, why would a company voluntarily offer this if it’s such a headache? The answer: employee attraction and retention. Most companies have the same problem right now, finding and retaining high-quality employees. If you can offer a benefit to your employees that your competitors do not, it could mean the difference between a new employee accepting or rejecting your offer.
The Secure Act 2.0 introduced a long list of new features and changes to employer-sponsored retirement plans. These changes are being implemented in phases over the next few years, with some other big changes starting in 2024. The introduction of Roth to Simple IRA plans just happens to be the first of many. Companies that take the time to understand these new options and evaluate whether or not they would add value to their employee benefits package will have a competitive advantage when it comes to attracting and retaining employees.
Other Secure Act 2.0 Articles:
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.
How Does A Simple IRA Plan Work?
Not every company with employees should have a 401(k) plan. In many cases, a Simple IRA plan may be the best fit for a small business. These plans carry the following benefits
Not every company with employees should have a 401(k) plan. In many cases, a Simple IRA plan may be the best fit for a small business. These plans carry the following benefits
No TPA fees
Easy to setup & operate
Employee attraction and retention tool
Pre-tax contributions for the owners to lower their tax liability
Your company
To be eligible to sponsor a Simple IRA, your company must have less than 100 employees. The contribution limits to these plans are about half that of a 401(k) plan but it still may be the right fit for you company. Here are some of the most common statements that we hear from the owners of the business that would lead you to considering a Simple IRA plan over a 401(k) plan:
"I want to put a retirement plans in place for my employees that has very low fees and is easy to operate."
"We are a start-up, we don't have a lot of money to contribute to the plan as the owners, but we want to put a plan in place to attract and retain employees."
"I plan on contributing $15,000 per year to the plan, even if I sponsored a plan that allowed me to contribute more I wouldn't because I'm socking all of the profits back into the business"
"I have a SEP IRA now but I just hired my first employee. I need to setup a different type of plan since SEP IRA's are 100% employer funded"
Establishment Deadline
The deadline to establish a Simple IRA plan is October 1st. Once you have cross over that date, you would have to wait until the following calendar year to set the plan.
Eligibility
The eligibility requirements for a Simple IRA are different than a SEP IRA or 401(k) plans. Unlike these other plan "1 Year of Service" = $5,000 of compensation earned in a calendar year. If you want to only cover "full-time" employees with your retirement plan, you may need to consider a 401(k) plan which has the 1 year and 1000 hours requirement to obtain a year of service. The most restrictive "wait time" that you can put into place is 2 years. Meaning an employee must obtain 2 years of service before they are eligible to start contributing to the plan. You can also be more lenient that 2 years, such as immediate entry or a 1-year wait, but 2 years is the most restrictive it can be.
Types of Contributions
Like a 401(k) plan, Simple IRA have both employee deferral contributions and employer contributions.
Employee Deferrals
Eligible employees are allowed to make pre-tax contributions to their Simple IRA accounts. The contribution limits are less than a traditional 401(k). Below is a tale comparing the 2021 contribution limits of a Simple IRA vs a 401(k) Plan:
There are not Roth deferrals allows in Simple IRA plans.
Employer Contributions
Unlike other employer sponsored retirement plans, employer contributions are mandatory each year to a Simple IRA plan. The company must choose between two pre-set employer contribution formulas:
2% Non-elective
3$ Matching contribution
With the 2% non-elective contribution, the company must contribute 2% of each eligible employee’s compensation to the plan whether they contribute to the plan or not.
For the 3% matching contribution, it’s a dollar for dollar match up to 3% of compensation that they employee contributes to the plan. The match formula is more popular than the 2% non-elective contribution because the company only must contribute if the employee contributes.
Special 1% Rule
With the employer matching contribution there is also a special rule. In 2 out of any 5 consecutive years, the company can lower the employer match to as low as 1% of pay. We will often see start-up company's take advantage of this rule by putting a 1% employer match in place for the first 2 years of the plan to minimize costs and then they are committed to making the 3% match for years 3, 4, and 5.
100% Vesting
All employer contributions to Simple IRA plans are 100% vested. The company is not allowed to attach a "vesting schedule" to the contributions.
Important Compliance Requirements
Make sure you have a 5304 Simple Form in your files for each year you sponsor the Simple IRA plan. If you are audited by the IRS or DOL, they will ask for these forms. You need to distribute this form to all of your employee each year between Nov 1st and Dec 1st for the upcoming plan year. The documents notifies your employees that:
A retirement plan exists
Plan eligibility requirement
Employer contribution formula
Who they submit their deferral elections to within the company
If you do not have this form on file, the IRS will assume that you have immediate eligibility for your Simple IRA plan, meaning that all of your employees are due employer contributions since day one of employment. Even employee that used to work for you and have since terminated employment. It’s an ugly situation.
Make sure the company is timely when submitting the employee deferrals to the Simple IRA plan. Since you are withholding money from employees pay for the salary deferrals the IRS want you to send that money to their Simple IRA accounts “as soon as administratively feasible”. The suggested time phrase is within a week of the deduction in payroll. But you must be consistent with the timing of your remittances to your Simple IRA plan. If you typically submit contributions to your Simple IRA provider 5 days after a payroll run but one week you randomly submit it 2 days after the payroll run, 2 days just became the rule and all of the other deferral remittances are “late”. The company will be assessed penalties for all of the late deferral remittances. So be consistent.
Cannot Terminate Mid-Year
Unlike other retirement plans, you cannot terminate a Simple IRA plan mid-year. Simple IRA plan termination are most common when a company started with a Simple IRA, has grown in employee head count, and now wishes to put a 401(k) plan in place. You must wait until after December 31st to terminate the Simple IRA plan and implement the new 401(k) plan.
Special 2 Year Rule
If you replace your Simple IRA with a 401(k) plan, the balances in the Simple IRA can usually be rolled over into the new 401(k) if the employee elects to do so. However, be very careful of the special Simple IRA 2 Year Distribution Rule. If you process any type of distribution from a Simple IRA, within a two-year period of the employee depositing their first dollar to the account, and the employee is under 59½, they are hit with a 25% IRS penalty. THIS ALSO APPLIES TO DIRECT ROLLOVERS. Normally when you process a direct rollover from one retirement plan to another, no taxes or penalties are assessed. That is not the case in Simple IRA plan so be care of this rule. If you decide to switch from a Simple IRA to a 401(k), make sure you run a list of all the employees that maintain a balance in the Simple IRA plan to determine which employees are subject to the 2-year withdrawal restriction.
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.
