Roth Catch-Up Contributions - Are You Ready for January 1, 2026?

Starting January 1, 2026, a key provision of SECURE 2.0 will officially take effect: Roth Catch-Up Contributions will be mandatory for certain high-income earners aged 50 and older. This change, originally slated for 2024, was delayed giving plan sponsors, recordkeepers, and payroll providers time to prepare. Now, with the final regulations released by the IRS and Treasury Department, the countdown is real.

What's Changing?

Under the new rule, participants aged 50+ earning more than $145,000 in prior-year wages must make their catch-up contributions on a Roth (after-tax) basis. Traditional pre-tax catch-up contributions will no longer be allowed for this group.

This shift is designed to enhance retirement savings flexibility and tax diversification, but it also introduces operational complexity for plan sponsors.

What You Need To Do Now

With the effective date fast approaching, plan sponsors should take the following steps:

• Confirm with your recordkeeper that Roth catch-up functionality is enabled and tested.

• Coordinate with your payroll provider to ensure wage tracking and Roth designation are properly configured.

• Review participant communications to ensure employees understand the change and its impact.

• Consult resources like Fidelity's Roth Catch-Up Resource Center for implementation guidance.

Helpful Resources

• NAPA: What's the Actual Effective Date? - Clarifies the timeline and compliance expectations.

• 401k Specialist: IRS Final Regulation Summary - Details on the finalized rules.

• SPARK Guide for DC Plans - Practical implementation tips.

Final Thoughts

January 2026 may feel distant, but the groundwork must be laid now. Don’t wait until year-end to discover gaps in your systems or communications. Confirm with your partners today and ensure your plan is ready to go.

Scott Higgins | AIF ®, CFP®, CPFA®, NSSA®

Financial Advisor

Securities and Investment Advisory Services Offered Through M Holdings Securities, Inc., a Registered Broker/Dealer and Investment Adviser, Member FINRA/SIPC. Rose Street Advisors is independently owned and operated. #4843970

Maximizing Returns: Strategic Asset Allocation for Roth and Pre-Tax Retirement Accounts

As a financial advisor, we employ a strategy that allocates more aggressive and growth-oriented assets to Roth accounts while positioning conservative assets in pre-tax retirement accounts. This approach is designed to optimize the long-term growth potential and overall risk profile of your global portfolio. Here's a closer look at how this strategy works and why it benefits our clients.

Strategic Allocation: Roth vs. Pre-Tax Accounts

Roth Accounts:

1. Aggressive Growth Assets: We allocate higher-growth investments, such as stocks, small-cap equities, and emerging markets, to Roth accounts. The tax-free growth and withdrawals of Roth accounts make them ideal for investments with higher potential returns.

2. Long-Term Horizon: Roth accounts typically have a longer investment horizon, allowing for more aggressive growth strategies. The extended time frame provides opportunities to ride out market volatility and capitalize on compounding returns.

Pre-Tax Accounts:

1. Conservative Assets: In pre-tax accounts, we allocate more conservative investments, such as bonds, money market funds, and dividend-paying stocks. these assets provide stability and income, aligning with the tax-deferred nature of pre-tax accounts.

2. Mitigating Tax Impact: By placing conservative assets in pre-tax accounts, we aim to reduce the tax burden when required minimum distributions (RMDs) begin. The lower growth rate of conservative investments results in smaller RMDs, helping manage taxable income in retirement.

Benefits of This Strategy

1. Tax Efficiency: Allocating high-growth assets to Roth accounts allows for tax-free compounding of returns, maximizing the benefits of tax-free withdrawals in retirement.

2. Optimized Growth Potential: By leveraging the tax-free nature of Roth accounts, we enhance the potential for substantial growth, which can significantly boost overall retirement savings.

3. Risk Management: Placing conservative assets in pre-tax accounts helps balance the portfolio's risk, providing stability and protecting against market downturns.

4. Holistic Approach: This strategy ensures that all assets work together to meet the global portfolio’s risk profile and investment objectives, creating a cohesive and effective retirement plan.

5. Flexibility in Retirement: The combination of aggressive and conservative assets across different account types provides flexibility in managing withdrawals and tax implications during retirement.

Considerations for Investors

• Risk Tolerance: Assess your risk tolerance to ensure the asset allocation aligns with your comfort level and financial goals.

• Time Horizon: Consider the time horizon for each account, as longer horizons typically warrant more aggressive growth strategies.

• Tax Implications: Evaluate the tax benefits and potential impacts of different account types to maximize overall portfolio efficiency.

Conclusion

Our strategic allocation approach, dividing aggressive growth assets to Roth accounts and conservative assets to pre-tax accounts, aims to optimize tax efficiency, manage risk, and enhance growth potential. This holistic strategy ensures that your total assets work together to meet your global portfolio risk profile and investment objectives, providing a strong foundation for a secure retirement.

Scott Higgins | AIF ®, CFP®, CPFA®, NSSA®

Financial Advisor

Since 2012 at Rose Street, Scott has been responsible for helping the firm’s individual wealth management clients with income strategies for retirement and consulting with employers with their employee retirement plans. In free time, he enjoys golf, biking, skiing, cooking, and traveling. Fun Fact, Scott has a hobby of filling growlers with coins!

Pre-Tax vs. Roth Retirement Savings: What’s the Difference?

When it comes to saving for retirement, choosing between pre-tax and Roth savings options is one of the most important decisions you’ll make. Both have unique benefits, and understanding their differences can help you make a choice that aligns with your financial goals and tax strategy. Let’s break it down:

Pre-Tax Retirement Savings

Contributing to a pre-tax account, such as a traditional 401(k) or IRA, means your contributions are made before taxes are deducted from your income. Keep in mind the annual contribution limits differences in an individual IRA or Roth and those of an employer sponsored retirement plan such as a 401(k).

Key Benefits:

• Immediate Tax Savings: Your taxable income is reduced in the year of contribution, potentially lowering your tax bill.

• Tax-Deferred Growth: Investments grow without being taxed until you withdraw them in retirement.

• Ideal for Higher Earners: If you’re in a high tax bracket now and expect to be in a lower one during retirement, this option may save you money in the long run.

Consideration:

• Withdrawals in retirement are taxed as ordinary income.

• Required minimum distributions (RMDs) begin at age 73, forcing you to take taxable withdrawals.

Roth Retirement Savings

Roth contributions, available in accounts like a Roth 401(k) or Roth IRA, are made with after-tax dollars. While there’s no immediate tax deduction, the long-term benefits can be substantial.

Key Benefits:

• Tax-Free Withdrawals: Qualified withdrawals of contributions and earnings are completely tax-free in retirement.

• No RMDs for Roth IRAs, Roth 401(k), Roth 403(b) and 457(b): You’re not required to take distributions during your lifetime, allowing your savings to grow tax-free indefinitely.

• Flexibility for Lower Earners: If you’re in a lower tax bracket now, paying taxes upfront may make sense.

Consideration:

• Contributions don’t reduce your taxable income in the year they’re made

• Recent tax rule changes no longer require RMDs from Roth 401(k) 403(b) 457(b) accounts similar to Roth IRAs.

Which Option is Right for You?

The best choice depends on your current tax situation, future income expectations, and retirement goals:

• If you anticipate being in a lower tax bracket in retirement, pre-tax savings may provide greater benefits.

• If you’re in a lower tax bracket now or want to hedge against future tax increases, Roth savings can offer tax-free income in retirement.

• A mix of both accounts can give you flexibility and diversification to manage taxes effectively in retirement.

• If a high income earner, there are no income limits to make Roth contributions to 401(k), 403(b), and 457(b) accounts.

• If you’re a younger age, a Roth may be advantageous with a longer timeframe to potentially benefit from compounding returns.

Final Thoughts

Understanding the differences between pre-tax and Roth retirement savings is key to building a tax-efficient strategy for the future. By weighing the pros and cons of each option, you can choose a path that helps increase your savings and decrease tax burdens

Julia Sanders | AIF ®, CPFA®

Retirment Relationship Manager

Meet Julia, a people-focused life-long learner with several years of experience in the retirement plan industry. Throughout her career, Julia has been committed to maintaining strong client relationships by providing incredible customer service. She is passionate about helping clients define and plan for their retirement goals. Julia’s daily role at the firm energizes and reinforces her commitment to client-focused work.