If you are a high-earning professional over age 50, a significant change is coming to your retirement strategy. While many have heard buzz about a “big, beautiful bill” regarding taxes, it is important to distinguish the specific impacts of the SECURE Act 2.0.
The most direct change for high earners is the new Roth 401(k) catch-up requirement. This isn't just a minor update, it is a structural shift in how late-career savings are taxed.
What is Changing?
Under the SECURE Act 2.0, workers who meet two criteria:
1. Are age 50 or older, and
2. Earn more than $145,000 in prior-year wages (indexed for inflation).
...will be required to make all 401(k) catch-up contributions on a Roth (after-tax) basis. You will no longer be able to make these specific contributions on a pre-tax basis.
The Timeline
Originally set for 2024, the IRS delayed this rule to give payroll systems and employers time to adjust. The requirement is now officially expected to take effect in 2026. This "breathing room" is the perfect window to adjust your financial plan before the mandate begins.
Why the Change?
This provision was designed to accelerate federal tax revenue. By requiring higher earners to pay taxes on their catch-up contributions now rather than deferring them until retirement, the government shifts tax collection to the present day.
The Planning Impact
For years, the "catch-up" was a primary way for high earners to lower their taxable income during their peak earning years. Removing this elective lever means:
· Higher Current Taxes: Your taxable income may increase because you can no longer deduct these contributions.
· Less Flexibility: You lose the choice of how those specific dollars are taxed today.
The Silver Lining
It’s not all bad news. Roth dollars offer incredible long-term benefits that shouldn't be overlooked:
· Tax-Free Growth: Your contributions and earnings grow tax-free.
· Tax-Free Income: You won't owe a dime in taxes on these withdrawals in retirement.
· Estate Advantages: Roth accounts are often superior vehicles for passing wealth to the next generation.
What You Should Do Now
Planning early is the key to avoiding a surprise tax bill. If you are near or above the $145,000 income threshold, now is the time to:
1. Review Cash Flow: Ensure your budget can handle after-tax contributions.
2. Adjust Tax Withholdings: Work with your advisor to see if you need to adjust your withholdings to account for the loss of the pre-tax deduction.
3. Coordinate Strategies: Look at your total portfolio, including Roth IRAs and conversion strategies, to ensure this new rule fits into your broader plan.
The SECURE Act 2.0 has removed some of your choices, but it hasn't removed your ability to succeed. Sound planning isn't about avoiding the rules; it’s about mastering them.
Together, we can work to keep you on-track toward your financial goals.
Request a consultation to learn more.
Read more articles by Deborah Federick