Roth 101: Building a Tax-Savvy Retirement Plan

A strong retirement plan isn’t just about contribution rates – it’s about tax positioning that plan participants can understand and act on. Roth contributions offer this unique benefit, empowering plan sponsors with more levers to meet diverse participant needs while maintaining streamlined plan administration.

What Sets Roth Contributions Apart

Roth contributions have been available in qualified retirement plans since 2006 and offer a powerful combination: tax-deferred growth on investment earnings and, if requirements are met, tax-free distributions of both contributions and earnings.

Roth after-tax salary deferral contributions are treated similarly to pre-tax contributions in several respects:

• They count toward the same annual deferral limit.
• They are eligible for employer matching contributions, if the plan permits.
• They are generally available for distribution under the same rules.

For distributions of Roth contributions and their related earnings to be tax-free, the initial Roth deferral must have been held in the plan for at least five calendar years (the “5-year clock”), and the distribution must be made after the participant reaches age 59 ½, becomes disabled, or passes away.

In-Plan Roth Conversions: A Flexible Lever

An in-plan Roth rollover, transfer, or conversion (often collectively referred to as a “conversion”) is an optional plan feature that allows participants to convert pre-tax amounts already held in a retirement plan, such as pre-tax salary deferrals, employer matching contributions, or nonelective contributions, into Roth amounts within the same plan. The dollars never leave the plan; only their tax character changes.

This conversion triggers a taxable event in the year it is made. The participant will receive a Form 1099-R reporting the converted amount as taxable income, which must be reported on their personal tax return for that year.

Importantly, there is no 10% early withdrawal penalty on the amount converted, even if the participant is under the age of 59½. Each conversion starts a separate five-year clock for qualified tax-free distributions of the converted amount and any associated earnings. 

Mandatory Roth Catch-Up for High Earners

Effective Jan. 1, 2026, catch-up contributions for high earners must be Roth. A “high earner” is defined as an individual who earned more than $150,000 (indexed annually) in FICA wages from the same employer in the prior calendar year. Individuals with self-employment income who do not receive FICA wages from the plan sponsor are exempt from this requirement.

Key implications of this provision:

• Applies only to 401(k), 403(b), and governmental 457(b) plans; not SARSEP or SIMPLE IRA plans.
• Covers all catch-up contributions, including the regular age 50 catch-up and “super” catch-up for ages 60–63.

Going forward, plan sponsors who want to allow high earners to continue making catch-up contributions must permit Roth contributions – and Roth must be available to all participants, not just high earners.

Employers should begin working with their recordkeepers to determine if additional data is needed to track high earners and Roth contributions and consult with payroll providers to identify any limitations or compliance requirements.

How to Correct Roth Catch-Up Errors

As this is a new provision, mistakes may occur. There are three primary ways to correct errors, depending on when they are caught:

• Before calendar year-end: Correct via the participant’s W-2.
• After year-end or within the plan: Use an in-plan Roth conversion; a Form 1099-R will be issued.
• Distribution of the excess, plus earnings, directly to the participant.

Any approach triggers taxable income for the affected participant.

The Mega Backdoor Roth: Design for Scale

A mega backdoor Roth strategy can accelerate tax-advantaged savings beyond standard Roth limits. It relies on after-tax employee contributions and a subsequent in-plan Roth conversion or direct rollover to a Roth IRA. This strategy allows participants to build up significant Roth assets inside the plan, potentially well beyond the standard Roth contribution limits.

Considerations for Plan Sponsors

• Plan design: The plan must permit both after-tax employee contributions (distinct from pre-tax/Roth deferrals) and in-plan Roth conversions.
• Testing requirements: The plan sponsor must perform the Actual Contribution Percentage (ACP) test on after-tax contributions, even if it’s a safe harbor plan that otherwise avoids ACP testing.
• Refunds for failed testing: If the plan fails ACP testing, excess after-tax contributions (and related earnings) must be refunded to affected participants. Refunded earnings are taxable.
• Tax reporting: Any converted earnings are taxable in the year of conversion and reported on Form 1099-R.
• Five-year rule: Each year’s conversion starts a new 5-year clock for qualified tax-free distributions.

Employer Roth Contributions: New Options Under SECURE 2.0

Under SECURE 2.0, employers now have the option to permit matching and/or nonelective contributions to be made as Roth contributions in their retirement plans. This is an optional provision that must be elected by the plan sponsor.

If a plan allows this feature and a participant chooses to receive employer contributions as Roth, the following rules apply:

• The participant must be 100% vested in the applicable employer contribution (matching or nonelective) at the time the Roth contribution is made.
• The employer Roth contribution is not included in the participant’s W-2 wages, but it is reported on Form 1099-R for the calendar year in which the Roth contribution is made, resulting in taxable income to the participant for that year.

This process essentially treats the employer contribution as if it were made on a pre-tax basis, followed immediately by an in-plan Roth conversion. It’s important to note that the Form 1099-R is issued for the year the Roth deposit is made, which may be different from the plan year to which the contribution relates.

Roth Accounts & RMD Calculations

Roth accounts in employer retirement plans (such as Roth 401(k), Roth 403(b), and Roth 457(b)) are now excluded from required minimum distribution (RMD) calculations. This aligns the treatment of in-plan Roth accounts with Roth IRAs and removes the need for participants to roll over Roth balances solely to avoid RMDs.

Who Benefits From a Roth Strategy?

Roth accounts can be beneficial for participants across career stages and planning goals:

• Early-career savers: Maximize decades of potential tax-free growth.
• Highly compensated employees: Access Roth inside the plan even if ineligible for a Roth IRA.
• Mid-to-late career participants (with 5+ years to retirement): Build a tax-free income stream and diversify future tax exposure.
• Estate planners: Enhance wealth transfer with generally tax-free distributions to beneficiaries.

Roth contributions can transform your plan into a more powerful, participant-centered savings vehicle – if they’re designed and administered the right way. Connect with CBIZ Retirement & Investment Solutions to assess your plan, align features with your workforce, and implement Roth strategies with precision.

Investment advisory services provided through CBIZ Investment Advisory Services, LLC, a registered investment adviser and a wholly owned subsidiary of CBIZ, Inc.