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SECURE 2.0 greatly expanded the Roth contribution options available to small business 401(k) plans, giving employees more flexibility and creating meaningful new tax-planning opportunities.
With SECURE 2.0's Roth catch-up rules for high earners taking effect in 2026, Roth contributions are expected to become a standard feature in most 401(k) plans. As a result, both employers and employees should take a fresh look at whether Roth 401(k) contributions make sense for their plans and personal tax strategies.
This FAQ is intended to help employers and employees decide whether to offer or use Roth contributions. It explains the differences between pre-tax and Roth contributions, how Roth earnings can avoid taxation, and who may be the best candidates for Roth contributions.
What are Roth 401(k) Contributions?
Most 401(k) contributions are made on a pre-tax basis. These contributions reduce taxable income in the year they are made, and earnings grow tax-deferred until distribution. When distributed, both contributions and earnings are taxed at ordinary income tax rates.
Roth contributions work differently. Employees pay income taxes on Roth contributions in the year they are made, but qualified distributions — including earnings — are tax-free. This allows employees to build a tax-free source of income for retirement.
The pre-tax versus Roth decision does not have to be an all-or-nothing strategy. Many employees use a combination of pre-tax and Roth contributions to diversify their future tax exposure.
Who Can Make Roth 401(k) Contributions?
Unlike Roth IRA contributions, there are no income limits for Roth 401(k) contributions. Any employee may make Roth contributions if the employer's 401(k) plan permits them.
What Are the Roth Rules for Elective Deferrals?
Elective deferrals are the amounts employees choose to have withheld from their pay and contributed to the plan. If the employer allows Roth deferrals, employees may generally choose between pre-tax and Roth treatment.
Annual Deferral Limit
Roth elective deferrals are subject to the same Code §402(g) limit that applies to pre-tax elective deferrals. This limit is adjusted annually for inflation. For 2026, the elective deferral limit is $24,500.
Pre-tax and Roth deferrals are combined when applying this limit. An employee cannot contribute the maximum amount to both pre-tax and Roth accounts separately.
Catch-Up Contributions
Employees age 50 or older may make additional catch-up contributions above the §402(g) elective deferral limit. Catch-up contributions are subject to a separate annual limit. For 2026, the standard age-50 catch-up contribution limit is $8,000.
Increased Catch-Up Contributions for Ages 60–63
Starting in 2025, employees who are ages 60 through 63 are eligible for a higher catch-up contribution limit. These employees may contribute a catch-up amount equal to the greater of:
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- $10,000, or
- 150% of the age-50 catch-up limit in effect for 2024
Both amounts are adjusted annually for inflation. However, the indexed amounts did not change between 2025 and 2026. As a result, the enhanced age 60–63 catch-up limit remains $11,250 for 2026 (the greater of $10,000 or 150% × $7,500).
Importantly, a 401(k) plan must specifically permit the enhanced age 60–63 catch-up limit for eligible employees to take advantage of it. Plans that do not adopt this feature must continue to apply the standard age-50 catch-up limit to all eligible employees, regardless of age.
High Earners Must Contribute Catch-Ups as Roth
Starting in 2026, employees whose prior-year FICA wages from the employer exceed $150,000 (adjusted for inflation) must make all catch-up contributions as Roth deferrals, including any enhanced age 60–63 catch-up contributions. Pre-tax catch-up contributions are no longer permitted for these employees.
If a plan does not allow Roth elective deferrals, affected employees will not be able to make catch-up contributions at all. This change is prompting many employers to add Roth deferrals to their plans.
What are the Roth Rules for Employer Contributions?
SECURE 2.0 allows employees to designate employer contributions — such as matching or nonelective contributions — as Roth contributions, if the plan permits it.
Roth treatment of employer contributions is only allowed if those contributions are 100% vested at the time of designation. The designated amount is taxable to the employee in the year of contribution.
Although this provision is already effective, many service providers are still building the systems needed to administer it. As a result, Roth employer contributions remain uncommon in practice but are expected to become more widely used when systems become available.
What is an In-Plan Roth 401(k) Conversion?
An in-plan Roth conversion (also called an in-plan Roth rollover) allows employees to convert vested non-Roth balances to Roth accounts within the plan.
If permitted under the plan, employees may convert vested pre-tax deferrals, employer contributions, or rollover accounts — even if they are otherwise not eligible for a distribution, provided the plan specifically allows in-plan Roth conversions.
Converted amounts are taxable in the year of conversion but are not subject to the 10% early withdrawal penalty or mandatory tax withholding.
Employees often consider Roth conversions in years when income is temporarily lower or when account values have declined. Over time, conversions can be used to build a large tax-free retirement balance.
Because conversions create immediate taxable income, employees should consult a tax advisor before proceeding.
How are Roth 401(k) Contributions Taxed at Distribution?
Roth 401(k) contributions and Roth conversions are taxed upfront, which means amounts attributable to those contributions are not taxable when distributed. Whether earnings are tax-free depends on whether the distribution meets the requirements of a qualified distribution, most importantly the 5-year rule.
The 5-Year Rule
For earnings on Roth 401(k) contributions or Roth conversions to be distributed tax-free, the distribution must occur at least five years after the beginning of the year of the employee's first Roth contribution or Roth conversion under the plan.
The five-year period starts on January 1 of the year of the first Roth contribution or conversion, not the date the contribution or conversion is actually made.
Qualified Distributions
In addition to satisfying the 5-year rule, a Roth 401(k) distribution must also be made:
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- On or after attainment of age 59½,
- Due to disability, or
- After the employee's death
When both the 5-year rule and one of these events are satisfied, the distribution is considered qualified, and both contributions and earnings are distributed tax-free.
Non-Qualified Distributions
If a Roth 401(k) distribution does not satisfy the 5-year rule or is made before one of the qualifying events, the portion of the distribution attributable to earnings is taxable and may be subject to the 10% early withdrawal penalty. Amounts attributable to Roth contributions or Roth conversions are not taxable when distributed.
Rolling Roth 401(k) Contributions to a Roth IRA
When Roth 401(k) assets are rolled into a Roth IRA, the Roth IRA's 5-year clock applies, not the plan-specific Roth 401(k) clock. If the employee already has a Roth IRA that has met the 5-year rule, Roth 401(k) earnings may be immediately eligible for tax-free distribution; otherwise, the rollover starts a new 5-year clock.
What are the Roth Rules for Required Minimum Distributions
Beginning in 2024, Roth 401(k) accounts are no longer subject to required minimum distributions (RMDs) during the employee's lifetime. This change aligns Roth 401(k)s with Roth IRAs.
Prior to 2024, Roth 401(k)s were subject to RMD rules, although the Roth portion of an RMD was not taxable.
Avoiding lifetime RMDs is a significant planning advantage for employees who do not need retirement plan distributions to meet living expenses.
Who are the Best Candidates for Roth 401(k) Contributions?
Roth contributions are generally most attractive for employees who expect their tax rate to be higher in retirement than it is today.
Common scenarios include:
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- Younger employees with rising income potential
- Employees with long time horizons for tax-free growth
- High earners building tax-diversified retirement assets
- Employees ineligible for Roth IRAs due to income limits
- Employees seeking to minimize or avoid RMDs
Pre-tax contributions may be more appropriate for employees who expect lower tax rates in retirement, need the current-year tax deduction, or are close to retirement with limited time for tax-free growth.
It's All About the Taxes!
Deciding between Roth and pre-tax contributions requires making assumptions about future income and tax rates — both of which are uncertain.
Still, for many employees, Roth contributions are more attractive than they were just a few years ago, especially with:
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- Required Roth catch-ups for higher earners
- Expanded Roth design options
- Elimination of Roth 401(k) RMDs
Even if Roth contributions are not the right fit for everyone, employees at all income levels should reevaluate them as part of a broader retirement and tax strategy.
