Signed into law in 2022, SECURE 2.0 legislation pursued many of the key themes of the original SECURE Act from 2019, including expanding access to retirement accounts and promoting plan participation.
SECURE 2.0 featured over 90 provisions introduced over several years. Next year, a new provision will take effect that will impact retirement plan catch-up contributions for some plan participants. This will likely have an impact on an individual’s current tax bill as well as their retirement savings plan going forward.
Mandatory Roth catch-up contributions begin in 2026
The new rule mandates that retirement plan catch-up contributions be directed to a designated Roth account for participants whose prior year wages with the company sponsoring the retirement plan exceed $145,000 (subject to annual inflation adjustments). This change was supposed to begin in 2024 but was delayed administratively to provide plan sponsors and recordkeepers with more time to adjust systems and processes to comply with the new rule.
Here are a few additional details regarding the wage limit:
- For 2026, the rule applies to those with wages with their current employer exceeding $150,000 in 2025
- The threshold is based on Social Security wages (Box 3 on the W-2 form) and includes only previous year wages from the company sponsoring the retirement plan
- For example, if an employee had total wages during the previous year exceeding the threshold, but had switched companies, only the wages of the new company are considered as part of the test for the following plan year; the wage limit is not pro-rated based on how long you worked for the company the previous year
- Self-employed individuals are not subject to the new rule
- If the retirement plan does not offer contributions into designated Roth accounts, then the only participants that can make catch-up contributions are those who are below the new income threshold for Roth catch-up contributions
Retirement plan catch-up contributions for 2026
Source, Internal Revenue Service, 2025. Different catch-up rules apply to SIMPLE IRAs. 401(k), 403(b), and governmental 457 plans must comply with the new Roth catch-up rule.
Note that the new mandatory Roth rule does not apply to SIMPLE IRAs or the special 15-year catch-up option for 403(B) plans. This special 403(b) catch-up feature allows employees with at least 15 years of service at a qualified organization (like a public school, hospital, or church) to contribute an extra $3,000 per year, up to a lifetime maximum of $15,000. However, for the age 50+ catch-up contribution and additional catch-up beginning at age 60, the new Roth rule will apply to 403(b) plans.
Impact on taxes next year
Plan participants subject to the new rule who have historically made pre-tax catch-up contributions to their employer retirement plan will see changes in their paychecks next year. For example, a 60-year-old subject to the new rule, maxing out their salary deferral and taking advantage of the full catch-up contribution will report an additional $11,250 of taxable income on their 2026 tax return. At the highest tax bracket this equates to more than $4,000 in additional taxes due for tax year 2026. The additional income may also impact income phase-outs for certain deductions or other tax-related items. Of course, there are benefits from contributing to a Roth account including tax-free growth of earnings and withdrawals if requirements are met. Those who may be subject to the Roth catch-up rule next year will want to review their finances to account for the change in contribution type (i.e. from pre-tax to after-tax Roth).
Seek advice
It’s important for taxpayers to seek advice from a financial professional or tax expert to understand the impact of this new provision on their tax planning and retirement savings.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Any information, statement or opinion set forth herein is general in nature, is not directed to or based on the financial situation or needs of any particular investor, and does not constitute, and should not be construed as investment advice, forecast of future events, a guarantee of future results, or a recommendation with respect to any particular security or investment strategy or type of retirement account. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies should consult their financial professional.
Franklin Templeton, its affiliated companies, and its employees are not in the business of providing tax or legal advice to taxpayers. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon by any such taxpayer for the purpose of avoiding tax penalties or complying with any applicable tax laws or regulations. Tax-related statements, if any, may have been written in connection with the “promotion or marketing” of the transaction(s) or matter(s) addressed by these materials, to the extent allowed by applicable law. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.
A message from Advisor Perspectives and VettaFi: Discover something new! Click here to register for our upcoming webcasts.
© Franklin Templeton
Read more commentaries by Franklin Templeton
