The 2026 Roth Catch-Up Rule: The Glass Half Full Approach to a Tax Diversified Savings Plan
Quick Take
If you are age 50 or older and participating in an employer sponsored retirement plan, chances are you have been notified that the tax treatment of your catch-up contributions is changing in 2026.
As part of Secure Act 2.0, catch-up contributions made by high-earning employees, $150,000 or more, must be made on an after-tax (Roth) basis. While the reduction in tax deferral may be a disappointment, this update encourages high-earning plan participants to adopt a more balanced, tax-diversified retirement savings strategy.
A well-rounded retirement savings plan goes beyond maximizing contributions and focuses on building assets across taxable, tax-deferred, and tax-free accounts, giving retirees greater flexibility to manage income and “right size” the amount of taxes they will pay over the course of their lifetime.
Beginning this year, the SECURE Act 2.0 introduced a shift in how high-earning individuals make “catch-up” contributions to employer retirement plans. Traditionally, workers aged 50 and older could make catch-up contributions on either a pretax (traditional) or after-tax (Roth) basis, depending on their preference and approach to tax planning.
Under the new rule, if you are 50 or older and your prior-year FICA wages exceeded $150,000, any catch-up contributions you make to a 401(k), 403(b), or similar qualified plan must be made on a Roth (after-tax) basis beginning January 1, 2026.
Why This Change Can Enhance Your Tax Strategy
At first glance, being forced into Roth catch-up contributions might feel like a loss of flexibility — after all, pre-tax contributions reduce taxable income today. But this change can actually strengthen your long-term tax diversification, especially for high earners anticipating higher tax rates in retirement or seeking greater flexibility in how they withdraw retirement income.
Tax diversification means intentionally spreading your retirement assets across accounts with varying tax treatment — a strategy that helps adapt to changing tax laws, income needs, and retirement timing.
For high earners affected by this rule change, Roth catch-up means:
You receive tax-free growth on those extra catch-up dollars.
You extend the portion of your portfolio that can be withdrawn without generating taxable income in retirement.
You effectively diversify your tax exposure instead of concentrating all savings in tax-deferred buckets.
The Three Buckets of Retirement
A core principle of advanced retirement planning is recognizing that not all savings are taxed the same, and that these differences can be used to reduce lifetime taxes. The three primary tax “buckets” are:
1. Taxable Accounts
These include brokerage accounts, savings outside of qualified plans, or cash in bank accounts.
Tax treatment: Investment gains are taxed annually (capital gains, dividends).
Use in retirement: Good for early-stage withdrawals, emergency funds, or flexibility before required minimum distributions (RMDs).
Benefit: No contribution limits and full control over withdrawals.
2. Tax-Deferred Accounts
Examples include traditional 401(k)s, 403(b)s, and traditional IRAs.
Tax treatment: Contributions may be deductible today and grow on a tax-deferred basis; taxes are paid upon withdrawal at ordinary income rates.
Use in retirement: Ideal if you expect to be in a lower tax bracket later or want to lower taxable income today.
Consideration: RMDs begin after age 73 or 75 if you were born in 1960 or later.
3. Tax-Free (Roth) Accounts
Roth IRAs and Roth 401(k)s grow tax-free and qualified withdrawals in retirement are not taxed.
Tax treatment: Contributions are made after tax, but qualified distributions are tax-free.
Use in retirement: Excellent for managing future taxable income, minimizing the impact of RMDs, and leaving tax-efficient assets to heirs.
Advantages: Provides flexibility to generate tax-free income when needed, helping smooth tax brackets in retirement. In addition, Roth assets are highly effective for estate planning, as heirs can generally receive and withdraw these funds tax-free, preserving more wealth across generations.
This three-bucket approach helps you avoid over-concentration in any single tax treatment, giving you more control over your taxes year by year in retirement and across market cycles.
Catch-Up Contributions & Your Tax Diversification Plan
For high-income earners who choose to make catch-up contributions, those dollars will be made as Roth contributions. This can be viewed as a built-in tax diversification opportunity. Instead of automatically stacking more pre-tax dollars into a traditional 401(k), which could create a larger taxable withdrawal pool later—this rule encourages adding tax-free capacity to retirement savings. If Roth catch-up contributions don’t fit your plan, directing excess savings to a taxable investment account can be a great alternative, offering additional flexibility and long-term tax diversification.
When incorporated into a broader savings strategy that includes taxable and traditional tax-deferred accounts, Roth catch-up contributions can help you:
Strategically control your tax brackets in retirement.
Optimize withdrawal sequencing by pulling from taxable accounts first, then tax-deferred accounts, and finally tax-free accounts when it makes the most sense.
Reduce the long-term risk of higher tax rates or increased Medicare premium surcharges due to rising income.
In other words, what feels like a constraint today can provide flexibility and tax control tomorrow, which is a core tenant of any smart retirement savings plan!
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