The Internal Revenue Service (IRS) and the Department of the Treasury have released final regulations that postpone a significant change to retirement savings for high-income earners. A rule requiring certain catch-up contributions to be made on a post-tax Roth basis will now take effect for tax years beginning after December 31, 2026, giving employees and plan administrators more time to adapt.
Key Takeaways
- The mandatory Roth catch-up contribution rule, part of the SECURE 2.0 Act, is delayed until the 2027 tax year.
- The rule affects employees aged 50 and over with prior-year FICA wages exceeding $145,000 (a figure indexed for inflation).
- Affected plans include 401(k), 403(b), and governmental 457(b) retirement accounts.
- Until 2027, retirement plans can continue to permit pre-tax catch-up contributions for all eligible employees, regardless of income.
Details of the SECURE 2.0 Act Provision
The regulation change originates from the SECURE 2.0 Act, a comprehensive piece of legislation passed in 2022 to enhance retirement savings opportunities. One of its key provisions targeted how high-income workers make catch-up contributions.
Catch-up contributions allow individuals aged 50 and older to save additional funds in their retirement accounts beyond the standard annual limits. This helps them bolster their savings as they approach retirement age.
Under the SECURE 2.0 Act, a new requirement was introduced. Employees whose wages from the prior calendar year were $145,000 or more would be required to make any catch-up contributions to a designated Roth account. This means the contributions would be made with after-tax dollars.
Who is Affected by This Rule?
The rule specifically applies to a subset of retirement savers. To be affected, an individual must meet two criteria:
- Be age 50 or older and eligible to make catch-up contributions.
- Have earned FICA wages of $145,000 or more in the preceding year from the employer sponsoring the plan.
What are FICA Wages?
FICA wages are earnings subject to Social Security and Medicare taxes. This is a standard measure of an employee's compensation and is used by the IRS to determine eligibility for this specific retirement rule. The $145,000 threshold is subject to inflation adjustments in future years.
The provision covers popular employer-sponsored retirement plans, including 401(k), 403(b), and governmental 457(b) plans. The original implementation timeline created significant administrative challenges for plan providers, leading to calls for a delay.
Final Regulations Provide a Two-Year Delay
In response to feedback on the proposed rules, the IRS has formally pushed the mandatory implementation date. The final regulations state that the Roth catch-up requirement will now apply to taxable years beginning after December 31, 2026.
This means the rule will become effective for the 2027 tax year. The delay provides a crucial window for employers, payroll providers, and retirement plan administrators to update their systems and processes to comply with the new mandate.
The final regulations confirm that retirement plans can continue to permit all eligible employees to make catch-up contributions on a pre-tax basis until the new 2027 deadline, regardless of their income level.
While the requirement is delayed, the regulations permit plans to implement the Roth catch-up feature before 2027. However, this is optional, and most are expected to wait until the mandatory deadline approaches.
Administrative Transition Period
The IRS had previously established a two-year administrative transition period for 2024 and 2025, during which it would not penalize plans for noncompliance. The final regulations did not extend this period, but the overall delay to 2027 effectively provides similar relief.
Traditional vs. Roth Contributions: A Key Difference
The distinction between pre-tax (traditional) and post-tax (Roth) contributions is central to this rule change. Understanding this difference is essential for high-income earners planning for retirement.
Traditional (Pre-Tax) Contributions
With a traditional 401(k) contribution, money is deducted from your paycheck before federal and state income taxes are calculated. This has two immediate benefits:
- It reduces your current taxable income, potentially lowering your tax bill for the year.
- The money in the account grows tax-deferred over time.
Taxes are paid when you withdraw the funds during retirement. This strategy is often favored by those who expect to be in a lower tax bracket in retirement than they are during their peak earning years.
Roth (Post-Tax) Contributions
Roth contributions are made with money that has already been taxed. You do not receive an immediate tax deduction for these contributions.
The primary advantage of a Roth account is that qualified withdrawals in retirement are completely tax-free. This includes both your original contributions and all the investment earnings. This approach is beneficial for individuals who believe their tax rate will be higher in retirement or who want the certainty of tax-free income later in life.
The new rule will force high-earners to use the Roth approach for their catch-up contributions, shifting the tax benefit from the present to the future.
Planning for the 2027 Change
The two-year delay gives high-income employees more time to make pre-tax catch-up contributions and plan for the transition. Those affected should consider how this change impacts their overall retirement and tax strategy.
For now, savers over 50 with incomes above the threshold can continue making catch-up contributions in the same way they have been. However, beginning in 2027, they will need to ensure their plan can accommodate Roth contributions and adjust their financial planning accordingly.
This change is one of many introduced by the SECURE 2.0 Act, which also included provisions for increased catch-up limits for those aged 60-63, employer matching for student loan payments, and new rules for required minimum distributions (RMDs). Savers should review their retirement plans in light of these evolving regulations.
