In 2002, the government introduced a provision allowing individuals age 50 and older to contribute extra funds to their retirement accounts. This extra amount, known as a catch-up contribution, is designed to help those who may be behind on retirement savings to get back on track.
At that time, there were Roth IRAs, but 401(k) plans and other employer sponsored plans did not include a Roth version. Nearly 20 years later, the SECURE 2.0 Act expanded Roth options to most types of retirement accounts. In addition, to help raise revenue, the law now requires higher earning taxpayers to make catch-up contributions only to Roth accounts.
The rules
Section 603 of the SECURE 2.0 Act states that if your FICA wages for the previous calendar year exceeded $145,000 from the employer sponsoring your retirement plan, any catch-up contributions must go into a designated Roth account. This rule does not apply to employer-sponsored SIMPLE or SEP plans.
Although this change was originally set to begin in 2024, the IRS issued Notice 2023-62, delaying implementation until 2026. This gives employers time to adjust to the new rules and implement Roth options if they haven’t already.
Why this matters
Roth contributions can be appealing because qualified withdrawals in retirement are tax free. However, deciding to contribute to a Roth isn’t always straightforward because you pay taxes on contributions now instead of receiving a deduction.
Example: Jill, is a single taxpayer earning $250,000 in wage income. After including other income such as interest, dividends, and capital gains, and subtracting the standard deduction or itemized deductions Jill is in the 32% federal tax bracket. Switching a $7,500 catch-up contribution from traditional to Roth means paying an additional $2,400 in taxes upfront, not including state taxes ($7,500 * .32 = $2,400).
If Jill is between ages 60-63, she would qualify for a “super catch-up” contribution equal to 150% of the standard amount. This year, that’s $11,250, which would increase her federal taxes from $2,400 to $3,600.
Is Roth always better?
A Roth isn’t necessarily always better. The decision of Roth vs. Traditional generally boils down to tax rates – now and in the future. Consider these options:
- Contribute to a Roth when your tax rate is lower than your expected future rate.
- Choose Traditional when your current tax rate is higher than your future rate.
Example: Assume you can contribute $7,500 into a Traditional 401(k) or the after-tax equivalent into a Roth 401(k). You invest both the same for 10 years at 8% per year. You then liquidate both, paying tax on the Traditional and no tax on the Roth.
| Tax Rate at Contribution | ||||||||
| Tax Rate at Distribution | 10% | 12% | 22% | 24% | 32% | 35% | 37% | |
| 10% | Equal | T:$324 | T:$1,943 | T:$2,267 | T:$3,562 | T:$4,048 | T:$4,372 | |
| 12% | R:$324 | Equal | T:$1,619 | T:$1,943 | T:$3,238 | T:$3,724 | T:$4,048 | |
| 22% | R:$1,943 | R:$1,619 | Equal | T:$324 | T:$1,619 | T:$2,105 | T:$2,429 | |
| 24% | R:$2,267 | R:$1,943 | R:$324 | Equal | T:$1,295 | T:$1,781 | T:$2,105 | |
| 32% | R:$3,562 | R:$3,238 | R:$1,619 | R:$1,295 | Equal | T:$486 | T:$810 | |
| 35% | R:$4,048 | R:$3,724 | R:$2,105 | R:$1,781 | R:$486 | Equal | T:$324 | |
| 37% | R:$4,372 | R:$4,048 | R:$2,429 | R:$2,105 | R:$810 | R:$324 | Equal | |
* Cells starting with an “R” indicates the Roth beats the Traditional and “T” indicates the Traditional beats the Roth. The dollar amount that follows is the comparative after-tax benefit of that vehicle choice.
Planning tips
- Nearing the $145,000 earnings threshold? Consider using a Health Savings Account (HSA) or Flexible Spending Account (FSA) to reduce FICA wages.
- Well below the earnings threshold? You can choose between Roth and Traditional contributions.
- Well above the earnings threshold? Plan for higher taxes and adjust your withholding elections accordingly.
Make informed decisions
Retirement planning is evolving, and staying informed is key to making smart financial decisions. Whether you’re nearing retirement or just trying to optimize your contributions, understanding how these changes affect your taxes can help you avoid surprises.
Connect with your financial advisor to run personalized tax projections and review your retirement strategy. A little planning today can make a big difference tomorrow. Not a client of Mercer Advisors? Let’s talk.
Source: https://www.federalregister.gov/d/2025-17865
Mercer Advisors Inc. is a parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements.
All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate but is not guaranteed or warranted by Mercer Advisors. Content, research, tools and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. The hypothetical example above is for illustrative purposes only. Client experiences will vary, successful outcomes are not guaranteed.
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