The Roth Catch-Up Trap

The SECURE 2.0 Act brought sweeping changes to retirement plan rules, and one of the most confusing is the new Roth catch-up requirement for high earners. We previously published a blog post detailing new requirements for employers. (To read that, click here.) 

If you made more than $145,000 in FICA wages last year, any catch-up contributions (i.e., the additional amount those age 50+ can contribute) must now go into a Roth account using after-tax dollars, instead of going into their “traditional” account using pre-tax dollars. 

It sounds simple enough, but the new rule can create unexpected tax consequences, especially for employees nearing retirement. This is why we at Primark Benefits are calling it the Roth catch-up “trap.” In this blog article we are outlining some of the common pitfalls we see ensnaring well-meaning participants as this new rule takes effect. 

The Five-Year Rule 

One of the biggest surprises for participants using the Roth catch-up is the Five-Year Rule. Simply put, in order to take tax-freewithdrawals  from a Roth account, the account must have been open for at least five prior tax years. 

• Timing matters: For example, if you start Roth catch-up contributions at age 63 and retire at 65, you won’t meet the five-year requirement. Any earnings on those contributions could be subject to ordinary income taxes when withdrawn. 
• Rollovers reset the clock: Even if you already have a Roth 401(k) or 403(b), rolling funds into a new Roth IRA restarts the five-year timeline. That means a strategic rollover intended to consolidate accounts could unintentionally trigger taxable earnings if you withdraw too soon. 
• Earnings vs. contributions: Keep in mind that the rule applies to earnings, not the contributions themselves. Your contributions can always be withdrawn tax-free, but any growth or investment gains could be taxable if the five-year rule isn’t met. 

Roth contributions can be powerful, but starting late in your career or rolling into a new account without planning can create unexpected tax exposure. Reviewing timing and account strategy with your CPA or plan advisor can help avoid the “trap” and maximize the tax benefits of Roth contributions. 

Timing and account history matter, especially for employees close to retirement. 

Higher Taxable Income 

Because Roth contributions are made with after-tax dollars versus pre-tax, they increase one’s adjusted gross income (AGI) for the year. This can have several unintended consequences for high earners: 

• Medicare premiums: Medicare uses a two-year income lookback to calculate Part B and Part D premiums. A spike in AGI from Roth catch-up contributions or conversions could push you into a higher premium tier, potentially adding thousands of dollars to your healthcare costs. 
• Tax bracket impact: A higher AGI may move you into a higher federal or state tax bracket, increasing the overall taxes you owe for the year. 
• Loss of other tax benefits: Certain deductions, credits, and phaseouts are tied to AGI. For example, you might see reduced itemized deductions, limits on the student loan interest deduction, or restrictions on other retirement-related credits. 

Even well-planned Roth contributions can create a ripple effect if the timing and total contribution amounts aren’t carefully considered. That’s why it’s important to review your full tax picture before making large Roth catch-up contributions, especially in your final years of employment. 

Underpayment Penalties 

Another potential pitfall comes from late-year Roth catch-up contributions or conversions, which can trigger IRS underpayment penalties. Here’s why: 

• The IRS expects taxpayers to pay taxes on income as it’s earned. Large, unexpected Roth contributions can increase your tax liability mid-year. 
• If your estimated tax payments or withholding haven’t been adjusted accordingly, the IRS may assess penalties for underpayment, even if you pay the full amount when you file. 

To avoid surprises, your CPA may need to file Form 2210, which explains the timing of your payments and can prevent unnecessary penalties. This step is often missed by both taxpayers and software programs, leaving some participants unexpectedly on the hook for interest or penalties. 

Coordinating Roth contributions with your CPA or tax advisor is essential, especially for last-minute contributions at the end of the year. Proactive planning can help you capture the benefits of Roth contributions without creating unexpected costs. 

Bottom Line: 

Roth contributions can be powerful, but timing matters. For employees close to retirement, the “Roth catch-up” rule can create short-term tax pain with little long-term benefit. Here are some ways to protect yourself from being ensnared in the Roth Catch-Up “Trap”: 

• If eligible, consider opening a Roth IRA now. Even a small contribution starts the five-year clock.  Use the ‘backdoor’ funding strategy if necessary.’Coordinate with your CPA to review income impacts and avoid surprises. 
• Evaluate timing. For some high earners, pre-tax deferrals may still deliver greater overall tax efficiency. 
• The team at Primark Benefits is here to help you and your advisors model both pre-tax and Roth strategies to optimize contributions before year-end.