What Is Rothification and How Does It Affect Your 401(k)?

“Rothification” is a shift toward making retirement contributions with after-tax dollars instead of pre-tax dollars. This means you pay taxes on contributions in the present, rather than deferring the tax payment until you withdraw the funds in retirement. The concept became more prominent after the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act introduced changes to the nation’s retirement system.

A focus of SECURE 2.0 is the expansion of Roth-style savings within employer-sponsored plans like 401(k)s. The act introduced provisions that require certain contributions to be made on a Roth basis and gives employees new options to choose Roth treatment for employer contributions. These changes represent a notable evolution in how Americans can save for retirement, altering the timing of tax obligations for many savers.

The Legislative Basis for Rothification

The SECURE 2.0 Act of 2022 is the primary driver behind the recent trend of Rothification in employer-sponsored retirement plans. The law introduced several provisions that either mandate or offer new options for Roth contributions, altering the landscape for employees and employers. These changes were designed to increase the portion of retirement savings subject to immediate taxation, providing a different kind of tax advantage compared to traditional pre-tax savings vehicles.

One change applies to catch-up contributions for high-income earners. Catch-up contributions are additional amounts that individuals aged 50 and over can contribute to their retirement accounts above the standard annual limit. Beginning January 1, 2026, SECURE 2.0 will require that any catch-up amounts made by these participants be designated as Roth contributions, meaning they must be made on an after-tax basis.

A “high-paid participant” is an employee whose wages from the employer sponsoring the plan exceeded $145,000 in the preceding calendar year. This wage threshold is indexed for future cost-of-living adjustments. This provision specifically targets a subset of older, higher-earning employees, changing the default tax treatment for their additional retirement savings. This rule does not affect standard, non-catch-up contributions, which can still be made on a pre-tax basis if the plan allows.

SECURE 2.0 also introduced an optional feature for employers. The act permits employers to amend their retirement plans to allow employees to elect Roth treatment for vested employer matching and nonelective contributions. Previously, all employer contributions were made on a pre-tax basis, with the employee owing income tax on the funds and their earnings upon withdrawal.

This option gives employees the ability to pay income taxes on their employer’s contributions in the year they are made. By doing so, those employer contributions and their future investment earnings can be withdrawn tax-free in retirement, provided qualified distribution rules are met.

Tax Consequences of Roth Contributions

When an employee makes a Roth 401(k) contribution, the contribution is made with post-tax dollars. This means the amount is included in the employee’s gross income for the year, and income taxes are paid on it in the current tax year. There is no immediate tax deduction for making a Roth contribution.

In contrast, a traditional pre-tax contribution is deducted from an employee’s gross income, which lowers their current taxable income and tax bill. The tax obligation is deferred until retirement, at which point withdrawals of both the contributions and their earnings are taxed as ordinary income.

The main appeal of a Roth contribution emerges during retirement. When an individual takes a qualified distribution from their Roth 401(k), the withdrawals are free from federal income tax. This tax-free treatment applies to both the original contributions and all investment earnings. To be a qualified distribution, the withdrawal must typically be made after the account holder reaches age 59½ and after a five-year holding period for the Roth account has been met.

For example, an employee contributes $5,000 to their retirement plan. If made as a pre-tax contribution, their taxable income for the year is reduced by $5,000, and if that amount grows to $20,000 by retirement, the entire $20,000 is taxable upon withdrawal. If the same $5,000 is made as a Roth contribution, the employee pays income tax on it in the contribution year, but the entire $20,000 withdrawal in retirement is tax-free.

Key Considerations for Employees

A primary factor in choosing Roth is your current income tax bracket compared to your anticipated tax bracket in retirement. If you expect to be in a higher tax bracket during retirement, paying taxes now at a lower rate through Roth contributions could be advantageous. If you believe your tax rate will be lower in retirement, a traditional pre-tax contribution providing a tax deduction today might be more beneficial.

Since Roth contributions are made with after-tax dollars, electing this option will result in a lower net paycheck compared to making an equivalent pre-tax contribution. A pre-tax contribution reduces your taxable income, leading to less tax withheld from your pay. Employees must assess if they can afford this reduction in current disposable income for future tax benefits.

Using Roth accounts helps build tax diversification into your retirement savings. Having access to different types of accounts, such as taxable traditional 401(k)s and tax-free Roth 401(k)s, provides flexibility in managing your taxable income during retirement. This allows you to withdraw funds from different sources to control your tax liability each year.

Roth accounts can also offer estate planning benefits. Unlike traditional retirement accounts, Roth 401(k)s are not subject to required minimum distribution (RMD) rules for the original account owner, allowing funds to grow tax-free throughout your lifetime. When passed on to beneficiaries, they inherit a source of tax-free income, which can be more tax-efficient than a traditional retirement account.

Employer and Plan Administrator Responsibilities

Employers and plan administrators must make administrative and operational adjustments to implement the Rothification provisions of SECURE 2.0. The first step is to formally amend the 401(k) or 403(b) plan document. This legal document must be updated to reflect the new rules for mandatory Roth catch-up contributions or the optional feature for Roth employer contributions.

Payroll systems require updates to handle these new contribution types. For the rule taking effect in 2026, systems must identify employees who exceeded the $145,000 wage threshold in the prior year and designate their catch-up contributions as Roth. For optional Roth employer contributions, the system must track an employee’s election and calculate the associated income tax withholding, as these employer contributions are taxable to the employee in the year they are made.

Clear communication with employees is another responsibility for employers. Since these provisions can be complex, employees should understand how they work, who is affected, and what choices are available. Employers should provide clear explanations of the mandatory Roth catch-up rule for high earners and information about the optional Roth employer contribution feature if the plan adopts it. This communication helps employees make informed decisions about their retirement savings strategy.