A growing number of employers are providing their workforce with the option to contribute to Roth 401(k) accounts, thereby granting more individuals the advantage of tax-exempt growth on their retirement investments. This widespread adoption reflects a significant shift in retirement planning, offering a valuable alternative to traditional pre-tax contributions. The ability to withdraw earnings tax-free in retirement makes Roth accounts particularly appealing for those who anticipate higher tax brackets in their later years.
Data from the Plan Sponsor Council of America (PSCA) reveals a substantial increase in the availability of Roth 401(k) options. By the close of 2024, approximately 95.6% of all 401(k) plans included a Roth contribution feature, a notable rise from just 59.9% in 2015. This surge underscores a broader industry trend towards offering more flexible and tax-diversified retirement savings solutions to employees.
Unlike traditional 401(k)s, where contributions are tax-deductible in the year they are made, Roth 401(k) contributions are made with after-tax dollars. The key benefit of this approach is that all qualified withdrawals, including earnings, are entirely tax-free during retirement. This contrasts with traditional 401(k)s, where withdrawals are subject to ordinary income tax rates. The choice between a Roth and a traditional 401(k) often depends on an individual's current and projected future tax situation, with Roth being advantageous for those expecting higher taxes in retirement.
A significant factor contributing to the increased prevalence of Roth options is the federal Secure 2.0 Act, enacted in 2022. This legislation introduced new mandates, particularly for high-income earners. Specifically, individuals whose earnings exceed $145,000 will be required to make any catch-up contributions on a Roth basis, starting in 2027. This income threshold is subject to annual adjustments for inflation, potentially impacting more individuals over time.
Catch-up contributions allow individuals aged 50 and older to save an additional amount beyond the standard contribution limits. For example, in 2026, the annual catch-up contribution limit is set at $8,000, bringing the total potential contribution for eligible older workers to $32,500. Furthermore, special provisions allow workers aged 60, 61, 62, and 63 to contribute even more, up to $11,250 in catch-up contributions.
While the initial implementation of this rule was planned for 2024, it has been deferred until 2026, granting employers an additional year, until the beginning of 2027, to ensure full compliance with the new regulations. This administrative transition period is crucial for plans that do not yet offer a Roth option. For high-earning older workers in such plans, this change means that they may temporarily lose the ability to make catch-up contributions if their plan does not incorporate a Roth feature by the deadline.
It's important for high-income earners who plan to utilize catch-up contributions to verify that their employer-sponsored retirement plan includes a Roth option. Failure to do so could result in an inability to make these additional contributions under the new rules. According to Elizabeth Thomas Dold of Groom Law Group, the IRS has clarified that plans are not obligated to eliminate catch-up contributions altogether. Instead, the restriction primarily affects high-earning individuals, while others aged 50 and over can continue to make pre-tax catch-up contributions as before.