IRS Releases Final Roth Catch-Up Contribution Regulations, SECURE 2.0 Clarifications

The IRS released much-anticipated rules on Roth catch-up contributions and published clarifications of the SECURE 2.0 Act, a retiree reform bill approved late in 2022. The changes provide relief to plan sponsors, employers, and employees close to retirement age who depend on catch-up contributions to complete their nest eggs.

If you’re wondering how the finalized guidance affects you—or your retirement plan—here’s a breakdown of the key takeaways.

What Are Catch-Up Contributions?

Catch-up contributions allow individuals aged 50 or older to contribute extra money to their 401(k), 403(b), or similar employer-sponsored retirement plans beyond the standard annual contribution limits.

For 2025, the standard employee elective deferral limit is $23,000.

Workers age 50+ can make an additional $7,500 in catch-up contributions.

These contributions are intended to allow senior employees to save as much as possible in retirement savings in their final few years of employment before retirement. For instance, a 55-year-old person with an annual income of $170,000 would be permitted to contribute the $23,000 annual limit, plus the catch-up contribution amount of $7,500. That represents a total of $30,500—nearly a third more retirement saving for the year.

SECURE 2.0 and the Roth Catch-Up Requirement

The SECURE 2.0 Act had one significant change:

Catch-up contributions starting in 2026 to employees who earn more than $145,000 (adjusted for inflation) must be contributed to Roth accounts, not pre-tax accounts.

That is, higher-paid workers cannot keep catch-up contributions tax-free when they are contributed; they will be taxed when they are contributed but tax-free in distributions at retirement.

The IRS initially thought about deferral to 2023 with accelerated effective dates to give employers and plan sponsors an opportunity to adjust. The final regs maintain the mandate starting in 2026 with an absolute implementation timeline given to employers.

IRS Final Guidance: Major Points

The IRS final regulations shed some light on certain points which were unclear:

1. Mandatory Roth for High Income Earners (2026 And Later)

Those making over $145,000 (whose prior year's W-2 shows) will have pre-tax or Roth catch-ups going into accounts earmarked as Roth accounts. Those under the threshold might still get pre-tax or Roth catch-ups.

2. Plan Sponsor Responsibilities

Roth-only catch-up employer retirement plans and payrolls will be required to include Roth-only catch-ups for eligible employees. If the plan is not currently designed to accommodate Roth contributions, someone must create a new one by 2026 in order to become compliant.

3. Inflation Adjustment of Income Threshold

The $145,000 threshold itself will be inflation-adjusted, and the IRS will raise it annually to account for pay increases.

4. Implementation Delay Period

While the rule takes effect in 2026, transition relief is still an option, the IRS indicated, so plans can construct tracking systems for eligibility and process contributions in accordance.

Why This Matters to Workers

For workers close to retirement age, the final rules have a lot of implications:

Taxes Now Higher, But Tax-Free Retirements

More more highly compensated employees will pay taxes on catch-up contributions now but enjoy tax-free withdrawals in the future.

Potential Cash Flow Changes

Because Roth contributions are after-tax contributions, workers may receive slightly smaller checks than in the past when they were contributing pre-tax.

Increased Long-Term Appreciation

For others, Roth contributions can be long-term profit, especially if future taxes are higher.

Planning Option

Both pre-tax and Roth accounts offer plan flexibility for taxable retirement income.

What Plan Sponsors and Employers Need to Do

Plan sponsors and employers must move quickly to get ready:

• Implement Payroll Systems: Ensure systems are able to identify individuals who make more than the $145,000 annual income threshold and send their catch-up contributions to the correct location.
  
  
• Provide Roth Accounts if Not Provided: Plans that don't provide a Roth account must provide one by 2026.
  
  
• Notify Employees: Employees—especially employees 50 and above—must be notified as to how their contributions will be handled in the future.
  
  
• Coordinate with Providers: Compliance has to be coordinated by payroll units, HR staff, and third-party administrators.
  
  

Ad-hoc planning generates compliance issues, administrative nightmare, and furious employees.

Practical Example: How It Works

Let's assume Susan is 54 years old and makes $160,000 in 2025. She contributes $23,000 to her 401(k) and adds a $7,500 catch-up. In 2025, she still takes that catch-up pre-tax, reducing her tax income.

But from 2026, because her income is over the $145,000 limit, her $7,500 catch-up contribution will have to go into a Roth account. She'll pay tax on the $7,500 in 2026, but when she's retired at age 65, contributions and earnings on those contributions can be paid out tax-free.

Roth Catch-Up Contributions Under SECURE 2.0 FAQs

Q1. When do the Roth catch-up rules take effect?
 Beginning in 2026, high-income earners (those who earn above $145,000) will be required to contribute catch-up amounts on a Roth basis.

Q2. What if my employer doesn't provide a Roth option?
 Roth provision is required in such plans from 2026. Otherwise, employees stand to be excluded from catch-up contributions until compliance is achieved.

Q3. Do the changes affect ordinary contributions?
 No. The rule only applies to catch-up contributions for participants 50 and over. Regular elective deferrals are not touched.

Q4. How is the $145,000 limit calculated?
 It's based on W-2 earnings the previous year. Independent contractors and self-employed plan members aren't covered under this mandate but will be subject to other contribution guidelines.

Q5. Are Roth catch-up contributions always optimal?
 Not exactly. While Roth contributions are similar to tax-free withdrawals at retirement, there are some employees who wish to pay the taxes now and receive the tax advantage now. The rules deprive high-earning employees of that option, but it will remain an alternative for others.

Final Thoughts

IRS's ultimate regulations regarding Roth catch-up contributions provide welcome clarity to SECURE 2.0 provisions. While the changes represent some of an adjustment, especially for more compensated employees, they also present employees with an opportunity to build additional tax-favored retirement savings.

For employees, time to study retirement plans and prepare for the effect on contributions starting in 2026. For employers, the countdown starts to prepare payroll and plan systems.

Bottom line: the sooner the employees and employers prepare, the smoother the conversion will be when Roth catch-up contributions are required.