More Tax-Free Income in Retirement!

More Tax-Free Income in Retirement!

The recently passed SECURE 2.0 Act made several important changes to employer-sponsored retirement plans, including a new opportunity for saving money via the Roth portion of your employer-sponsored retirement accounts and a limitation on contributing to the tax-deferred portion of your retirement account.

Roth Accounts in General

Roth IRAs and 401(k)s have existed for some time. Contributions to a Roth account are not tax deductible but do grow tax-free. Qualified distributions are generally those after age 59 ½ and after the account has been open for 5 years. Qualified distributions are tax-free. Therefore, building balances in Roth accounts can result in more tax-free income in retirement, but at the cost of a tax deduction today.

Existing Rule: 401(k) Contributions

Under existing law, individuals can contribute up to $22,500 per year to their 401(k)/403(b)/457/TSP account. They can choose either regular (pre-tax) treatment or Roth IRA (after tax) treatment if their plan allows.

Existing Rule: Catch-up Contributions

Under existing law, individuals age 50 and older can contribute an additional amount to their 401(k)/403(b)/457/TSP account. This amount is currently $7,500 and will be adjusted for inflation in 2024 and future years. This means that in 2023, an individual over age 50 can contribute $30,000 to their 401(k) account.

New: Catch-Up Contributions Must Be Roth

If your wages in 2023 exceed $145,000 (this will be indexed for inflation in future years), then your 2024 catch-up contribution must be deposited into the Roth portion of your account. Your pre-tax contribution will be limited to $22,500 (adjusted for inflation). This is an important consideration for tax planning for those with W2 income greater than $145,000.

New: Employer Matching Roth Contributions

 If your plan allows it, in 2024 you can elect to have employer matching contributions or nonelective (profit sharing) contributions made to a Roth account in your 401(k), 403(b), TSP or governmental 457(b) plan. Previously, these types of contributions could only be made to the traditional (tax-deferred) account.

When Roth Employer Contributions Will Be in Effect

Technically, Roth employer matching and nonelective contributions can be made after the enactment date of the SECURE 2.0 Act, which is December 29, 2022.

However, it will take time for employers, payroll providers, and plan administrators to update systems and processes to accommodate this new type of contribution. Implementation will be done on a plan-by-plan basis, and it could be 2024 before you see it offered in your plan. Be sure to watch your inbox for communications from your employer.

How Roth Employer Contributions Work


Employees must elect for matching or nonelective contributions to be made into their plan’s Roth account. However, the new provision is optional for retirement plans, so employers are not required to update their plans to include it.

Roth employer contributions will be made on an after-tax basis. This means that any money your employer contributes to your Roth account will be included in your taxable income in the year of the contribution.

Vesting Requirement

One requirement in the SECURE 2.0 Act is that Roth employer contributions must be fully vested. This means that if your employer plan has a vesting schedule — for example, 25% of employer contributions vest each year over your first four years of employment — you may not be eligible to elect Roth contributions until after the full vesting period.


Taking Roth employer contributions out of your plan will work just like with any other Roth account. Contributions will come out tax free, and as long as you are age 59 ½ and have had the account open for five years or more, earnings distributions will also be tax and penalty free.

Who Should Consider Roth Employer Contributions

When determining whether to have your employer matching or nonelective contributions made to a Roth account, you should go through a process similar to the one you use when deciding where to direct your employee contributions.

The number one factor to consider is the current tax rate at which you’d receive a deduction for a pre-tax contribution (or, in the case of matching contributions, the rate at which you would avoid paying taxes on the additional income) as compared to the expected future tax rate that would be applied to distributions.

Of course, predicting your future tax rate — and more specifically the tax rate that you would pay on your pre-tax retirement account withdrawals — is no easy feat. However, there are some things you can consider that might make this clearer:

  • Is your income today significantly higher than the income you want to live off of in retirement?
  • Will you have future sources of taxable income, such as a pension or social security, that will drive up your future tax rate?
  • If you plan to leave money to future generations, will they likely be in a higher or lower tax bracket than you are while you’re making contributions?
  • Are you charitably inclined and considering taking advantage of qualified charitable distributions from your pre-tax retirement accounts?

These considerations won’t allow you to pinpoint your exact future tax rate but may allow you to make a more educated comparison between your current rate and potential future rate. You might want to consider splitting contributions between traditional and Roth contributions to give yourself more flexibility in retirement.

Does Your Plan Allow Roth Employer Contributions?

The new provision for Roth employer contributions is optional, which means that each employer can decide whether to implement the change. Keep an eye out for communication from your employer.

Presumably, all employer plan accounts will be required to allow for Roth contributions, since those with income greater than $145,000 will be required to contribute their catch-up contributions to the Roth account. Employers will need to update their plans for these new rules.

If you want to check on this change more proactively, reach out to your employer’s human resources department and ask for a copy of the summary plan description for your plan. When a retirement plan implements this new provision, it will need to update its plan documents, and this should be reflected in the summary plan description.


These rules will result in much larger Roth (after-tax, but tax-free growth) balances, both from matching contributions and catch-up contributions for those over age 50.

There are still some unanswered questions about how both of these provisions will be implemented. We don’t know exactly how the election to receive matching contributions in the Roth account will be made and when the new feature will be rolled out for your individual plan.

However, we do know that directing more money to your Roth 401(k)/403(b)/457/TSP will be an option for many employees, so now is the time to start thinking through whether you can benefit from this potentially powerful new way to save more money in a Roth account, where it will grow tax free, giving you more options between taxable and tax-free income in retirement.

Disclaimer/Author(s) Bio: This is not to be considered investment, tax, or financial advice. Please review your personal situation with your tax and/or financial advisor. Milestone Financial Planning, LLC, (Milestone), a fee-only financial planning firm and registered investment advisor in Bedford, NH. Milestone works with clients on a long-term, ongoing basis. Our fees are based on the assets that we manage and may include an annual financial planning subscription fee. Clients receive financial planning, tax planning, retirement planning, and investment management services, and have unlimited access to our advisors. We receive no commissions or referral fees. We put our client’s interests first.  If you need assistance with your investments or financial planning, please reach out to one of our fee-only advisors.  Advisory services are only offered to clients or prospective clients where Milestone and its representatives are properly licensed or exempt from licensure.

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