What the IRS’s New Roth Catch-Up Rule Means for High-Earning 401(k) Participants

The retirement landscape is changing rapidly, and one of the most talked-about updates in 2025 is the IRS’s final regulations regarding Roth catch-up contributions. This change, introduced under the SECURE 2.0 Act and clarified in August 2025, has major implications for both high-earning 401(k) participants and plan sponsors.

At LSC Financial, we specialize in helping plan sponsors and participants navigate complex regulatory changes like this one, ensuring retirement plans remain compliant and beneficial for everyone involved.

In this blog, we’ll break down what the new Roth catch-up rule means, who it affects, and what steps both employers and employees should take to adapt.

What Is the Roth Catch-Up Rule?

Catch-up contributions allow employees aged 50 or older to contribute extra funds to their 401(k) plans beyond the standard annual limits. For 2025, the standard contribution limit is $23,000, with an additional catch-up contribution limit of $7,500.

Previously, participants could make catch-up contributions on either a pre-tax basis (traditional 401(k)) or a post-tax basis (Roth 401(k)). That flexibility is now changing for certain employees.

What’s Changing in 2025?

The IRS’s new Roth catch-up rule applies to high earners making more than $145,000 annually from their employer in the prior year (indexed for inflation).

Here’s what’s different:

Mandatory Roth Treatment: If you earned more than $145,000 last year, any catch-up contributions you make to your 401(k) must now be made as Roth contributions, meaning post-tax.
No Pre-Tax Option: Higher-income participants can no longer make pre-tax catch-up contributions.
Tax Implications: Contributions will be taxed up front, but qualified withdrawals in retirement will be tax-free.

This means that if you are 50+ and earning above the threshold, you need to adjust your retirement strategy to account for the new tax treatment.

Why Did the IRS Make This Change?

The Roth catch-up rule is part of a larger shift in retirement policy under the SECURE 2.0 Act, aimed at:

Raising tax revenue now: Since Roth contributions are taxed upfront, the government benefits from immediate revenue.
Encouraging Roth adoption: More retirement savers are being nudged toward Roth accounts, which can provide tax diversification in retirement.
Closing compliance gaps: The IRS is aligning employer reporting and payroll systems to better track retirement contributions.

Who Is Affected?

Employees aged 50+ earning above $145,000 in the prior year.
Employers offering 401(k) plans that allow catch-up contributions (plan sponsors must now ensure Roth capability is available).
Payroll and HR departments, which need to update systems to properly allocate and report Roth catch-up contributions.

If you earn less than $145,000, you can continue making either traditional or Roth catch-up contributions, giving you more flexibility.

Pros and Cons of the New Rule

Pros for High Earners

Tax-free growth and withdrawals in retirement.
Greater tax diversification between traditional and Roth accounts.
Protection from potentially higher future tax rates.

Cons for High Earners

No immediate tax deduction for contributions.
Reduced ability to lower taxable income in the contribution year.
More complexity in financial planning and payroll reporting.

What Employers and Plan Sponsors Need to Do

This rule doesn’t just affect participants—it also places responsibilities on plan sponsors and administrators. At LSC Financial, we recommend that employers take the following steps:

Update Plan Documents: Ensure your 401(k) plan allows for Roth contributions. If not, amendments will be required.
Coordinate with Payroll: Payroll systems must be able to distinguish between standard contributions and Roth catch-up contributions.
Educate Employees: High-earning participants may be surprised by the tax change, so proactive communication is essential.
Review Compliance Deadlines: Employers need to ensure proper reporting and recordkeeping in line with IRS guidance.

What High-Earning Participants Should Do

If you are 50+ and earning over $145,000, here’s how to prepare for this change:

Review Your Tax Strategy: Work with a financial advisor to determine how Roth contributions fit into your overall plan.
Consider Tax Diversification: Balancing traditional and Roth accounts may provide more flexibility in retirement.
Plan for Reduced Deductions: Since Roth contributions are post-tax, you won’t get the same immediate tax break.
Maximize the Opportunity: Remember that Roth accounts allow your money to grow tax-free, which may benefit you in retirement if tax rates rise.

The Bigger Picture: Retirement Planning in 2025 and Beyond

This IRS ruling highlights a broader trend: the retirement landscape is becoming more complex. With SECURE 2.0 changes, evolving tax laws, and new investment options, both employers and participants need expert guidance.

At LSC Financial, we help plan sponsors stay compliant while empowering employees to make informed retirement decisions. Whether you’re an employer implementing these changes or a high-earner planning for retirement, we provide clarity in an increasingly complex system.

Final Thoughts

The new Roth catch-up contribution rule represents a significant shift for high-earning 401(k) participants. While it eliminates the ability to make pre-tax catch-up contributions for those earning above $145,000, it also opens opportunities for long-term tax-free growth.

For employers, the key lies in ensuring compliance, updating systems, and communicating effectively with employees. For participants, the focus should be on adjusting financial strategies to maximize retirement benefits.

With the right planning and expert guidance from LSC Financial, both employers and employees can turn this regulatory change into a strategic advantage.