5 Ways IRS’s New Roth Catch-Up Rule Could Affect Your Take-Home Pay
Written by
Chris Adam
Edited by
Angela Corry
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Workers who are age 50 and older are going to want to pay special attention to new regulations announced by the IRS. They address multiple SECURE 2.0 Act provisions related to catch-up contributions. Those are additional contributions under a workplace retirement plan for employees at least 50 years old.
Starting in January, those aged 60 and older can make an additional contribution to their retirement accounts of $11,250. For higher earners, those who make more than $145,000, any catch-up contributions for retirement accounts must now go into a Roth account instead of the traditional option.
“Individuals who are in the position to take advantage of catch-up contributions do need to be mindful of the SECURE 2.0 Act changes and the impact on current year tax savings,” said Marguerita Cheng, CEO of Blue Ocean Global Wealth. “While the opportunity to enjoy additional tax savings today will no longer be available, the opportunity for individuals to build a larger pool of tax-retirement savings for the future can provide tax diversification in the future.”
As a certified financial planner professional, Cheng said she also stresses the importance of both tax diversification and investment diversification. There are also several ways the IRS’s new Roth catch-up rule could affect your take-home pay.
Higher After-Tax Contributions
“The new rule requires higher catch-up contributions for workers 50+ to go into Roth accounts, meaning contributions are after-tax,” said Christopher Stroup, founder and president of Silicon Beach Financial. “Take-home pay may decrease in the short term, but future withdrawals grow tax-free, boosting retirement income and simplifying long-term tax planning.”
Reduced Immediate Cash Flow
Since Roth contributions are made with post-tax dollars, employees may notice smaller paychecks. Adjusting household budgets or temporarily reducing discretionary spending can help manage this short-term impact while maximizing long-term retirement benefits, Stroup added.
Opportunity for Tax Diversification
“Shifting catch-up contributions to Roth balances pre-tax and after-tax retirement accounts,” Stroup said. “This can create tax flexibility in retirement, even if it slightly reduces current take-home pay, allowing strategic withdrawals based on future tax brackets.”
Potential Employer Match Implications
Some employers match only pre-tax contributions. “Moving catch-up contributions to Roth accounts may affect employer matching if plan rules differ, so reviewing plan specifics is essential to avoid missing out on free retirement funds,” Stroup said.
Planning Considerations for High Earners
Stroup noted that high-income earners may see noticeable paycheck reductions.
“Coordinating Roth catch-up contributions with overall retirement strategy, tax planning and investment allocations ensures the long-term benefits outweigh the short-term cash-flow trade-offs,” Stroup said.
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