Planning and saving for retirement typically span decades of a person’s working years. Historically, planning boils down to maximizing contributions to an employer sponsored plan such as a 401(k), 403(b), or 457(b), in addition to an IRA.

Traditional vs Roth

Is it more beneficial to designate your contributions as traditional or a Roth? The answer relies on many factors such as what an employer plan allows, your income level, and age.

At age 50, you are allowed to make catch-up contributions. In 2025, if you are between ages 50-59 or 64 and older, you can make $7,500 in catch-up contributions and ages 60-63 can make $11,250. So, the question still remains, should these contributions be designated as pre-tax, Roth, or a combination?

Secure 2.0 Effect

As of 2026, the choice may be determined automatically for certain individuals due to a new IRS regulation. The Secure 2.0 Act states that if you’re aged 50 or older and make $145,000 or more in wages in the prior tax year with the same employer as the current year, the catch-up contributions to a qualified plan must be designated as Roth.

Example:

John works for ABC Enterprises in 2025 and earns $175,000 in wages. He is 64 years old.

In 2026 he still works for ABC Enterprises. He decides to maximize his contributions to his employer’s 401(k) plan, including catch-up contributions.

John chooses to contribute his catch-up portions to a traditional account. He is approaching retirement and would like the tax deduction now, while his income is higher than it will be in retirement. However, the choice is made for him. The catch-up contribution will be Roth.

The crux of this situation is to remember that it is determined by the wages earned in the PRIOR year with the SAME employer. If John were to change jobs partway through 2026, he will have the Roth restriction for his wages earned with ABC Enterprises in 2026.

However, with his new employer XYZ Business, he will be able to choose between pre-tax and Roth for his catch-up contributions for the wages earned with XYZ Business in 2026. In 2027, if he is still working for XYZ Business, he is back to having only Roth as an option for catch-up contributions with XYZ Business.

Employer Impact

Historically, employers have not been required to offer Roth deferrals. They have the option to allow the choice within their plans but have never been required. And while technically, this does not force employers to offer a Roth option in their plan, it does essentially tie their hands.

If they have employees aged 50 or older earning over $145,000 in wages in the prior year and do not offer a Roth option, these employees simply won’t be able to make catch-up contributions.

Employers now need to weigh the administrative expenses associated with adding a Roth option to their qualified plan against the risk of their employees missing important catch-up contributions.

Other Notes

  • Since the verbiage states this is related to wages earned, the consensus is this does not apply to self-employed individuals contributing to a Simple IRA.
    • Additionally, a Simple IRA is not considered a qualified plan.
  • The wage threshold will be indexed for inflation so it will be important each year to know the new threshold especially if you are right above or below it.
  • This was originally slated to start in 2024, but plan administrators asked the IRS for a delay while they navigated these new requirements and received guidance.

Currently, these are proposed regulations. There is a public hearing scheduled for April 7th to allow discussion from the public of their concerns. After that, they will proceed to a final rule which will be the regulation that the IRS enforces. The anticipated effective date will be six months after the final regulations are in place.

Retirement planning is a crucial task, and the process has become more complex due to these new regulations. If you have any questions about how to handle these new requirements, please reach out to your KT Tax Advisor.