Preview of what we’ll cover today:

✈️ What the New NEC Roth Option Is

💸 Why This Is a Big Deal for Pilots

⚠️ The Biggest Gotcha: No Tax Withholding

🖥️ How to Actually Elect the Option

🧠 Roth vs. Deferred: Distribution-Phase Reality

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More About This Episode:

Southwest pilots were hit with a major retirement change and fast. With little advance notice, Southwest rolled out a new NEC Roth option that allows company contributions to flow into a Roth 401(k), creating a powerful opportunity for long-term tax-free growth. Today we’re reacting to this big retirement news with the help of pilot tax specialist Zach Smith and breaking down exactly what this change means.

This video explains why this option is so unique: for the first time, pilots can potentially have most of their 401(k) contributions—both employee and employer—go into Roth accounts. That’s a massive shift for pilots facing growing tax problems in retirement due to large tax-deferred balances. Ryan and Zach walk through how Secure Act 2.0 made this possible, where to find the election on the Schwab site, and why pilots should double-check their investment elections if they’ve never used Roth before.

They also cover the biggest “gotcha”: no automatic tax withholding. Choosing the Roth NEC option creates additional taxable income today, which means pilots must proactively plan for the tax bill—either through adjusted withholding or disciplined cash planning. If you’re a Southwest pilot trying to make sense of confusing emails, FAQs, and last-minute changes, we hope this delivers some clarity when timing matters most.

Go Deeper Into The Episode:

0:00 – Intro

1:15 – The new Roth option

2:32 – Beware of this

4:30 – Making the changes in your account

6:11 – The retirement tax surprise for pilots

9:25 – Final thoughts

New 401(k) Plan Changes FAQs

In addition to our previous communication about the 401(k) Plan changes, we’ve compiled a list of frequently asked questions about the optional and mandatory provisions in this year’s plan.

By logging into http://www.workplace.schwab.com/swapa and following the path to Manage Account > Contributions > Contribution Changes you will find the pages to make selections to catch-up deferrals and employer contributions.

Please read through the FAQs below on Roth 401(k) catch-up contributions and Roth 401(k) Non-Elective Contributions (NEC), directing any further questions to 401k@swapa.org.

Roth 401(k) Catch-Up Contributions FAQs

Why are my age 50 and up catch-up contributions required to be Roth rather than offered as a choice of traditional or Roth as they have been in the past?

The SECURE 2.0 Act mandated 2026 catch-up contributions to be made only on a Roth basis if your Federal Insurance Contributions Act (FICA) wages from Southwest Airlines in 2025 exceeded $150,000.

If I am eligible for a catch-up contribution, do I have to make a separate catch-up deferral election to participate or is it automatic like it was in past years?

New catch-up deferral elections are required. If you haven’t entered a catch-up election, your employee contributions will stop once you reach the 2026 IRS 402(g) limit of $24,500.

What if I don’t contribute the IRS maximum of $24,500 (402(g)), but still reach the combined IRS additions limit of $72,000 (415(c))? Can I still make a catch-up contribution?

No, you must make the maximum individual contribution of $24,500 to be eligible for the catch-up contribution. Clearing the 402(g) limit of $24,500 in payroll deferrals is the trigger point to start catch-up contributions.

Is there a suggested minimum payroll deferral percentage to maximize my contributions? I would like to avoid my payroll deferrals from being “crowded out” by Company NEC contributions.

Yes, if you are under 50 years old in 2026, the suggested minimum payroll deferral is 10%. If you are 50 years or older, it’s 13%, and if you are turning 60–63, it’s 14%. These figures work regardless of your seat position or time in service at the Company.

Why was the order of operation changed for catch-up? I’m over 50 and in 2025 if I contributed only $7,500 from payroll it all went to my catch-up contributions. There was no need to clear the 402(g) limit of $24,000 first. Why this change?

To comply with the new SECURE 2.0 Act Roth catch-up mandate SWA’s payroll provider had to change programming. This change was a requirement for the new payroll programming.

I already have an investment election on file. Do I need to make an investment election for my Roth 401(k) catch-up contribution?

Yes, if you haven’t made an investment election for your Roth 401(k) catch-up contributions, your Roth 401(k) catch-up contributions will automatically be invested in the Capital Group Target Date Retirement Trust closest to your estimated retirement age of 65.

I want my Roth 401(k) catch-up contributions to be directed to the PCRA. My pre-tax 401(k) contributions are already directed to the PCRA. Do I need to make an investment election?

Yes, if you want your Roth catch-up contributions to be directed to your PCRA, then you must open a Roth PCRA in the 401(k) Plan and make a Roth-specific future investment election. Otherwise, your Roth catch-up contribution will be automatically invested in the Capital Group Target Date Retirement Trust closest to your estimated retirement age of 65.

Will taxes be withheld on Roth 401(k) catch-up contributions?

Yes, Roth 401(k) catch-up contributions will be treated as taxable income.

Can I still execute a Roth in-plan conversion?

Yes, the 2026 IRS Roth catch-up contribution limit of $8,000 is independent of any Roth 401(k) conversions.

Don’t income limits apply on Roth IRA contributions?

Yes, however the Roth IRA and Roth 401(k) are independent. Do not confuse a Roth IRA with a Roth 401(k). The IRS limits on Roth 401(k) and pre-tax 401(k) contributions are the same. The maximum amount available for catch-up deferral in 2026 in any combination is $8,000.

I am turning 50 in 2026. Do I need to wait until my birthday to make a Roth 401(k) catch-up election?

No, you are eligible to make a Roth 401(k) catch-up contribution any time during the year you turn 50 years of age.

I am 63 and won’t be 64 until later in the year. Am I eligible for the higher Roth 401(k) “super” catch-up contribution?

Unfortunately, no, per the SECURE 2.0 Act and IRS rules: The Roth 401(k) “super” catch-up contribution is only for participants turning age 60, 61, 62, and 63 in 2026.

Do I need to make any changes with regards to Roth NEC? What if I don’t want to make a Roth 401(k) NEC contribution?

The Roth 401(k) NEC is an optional provision. You can continue to receive your NEC as a pre-tax contribution. No action is required.

Is the Roth 401(k) NEC election a one-time election?

No, you can toggle back and forth between Roth 401(k) and pre-tax elections anytime.

Can I split my NEC between a pre-tax and Roth 401(k) contribution on the same paycheck?

No, you must preselect either a pre-tax or Roth 401(k) contribution. You cannot divide your contribution from the same paycheck.

Is the Roth 401(k) NEC held in a different plan from my current 401(k) plan?

No, your Roth and pre-tax funds are held within the same plan, but they are treated as separate sources for tax reasons.

Will taxes be withheld on Roth 401(k) NEC contributions?

No, it is your responsibility to pay income taxes on those contributions on your tax return for the year.

Is there a limit to Roth 401(k) NEC contributions?

Yes, the 2026 annual compensation limit is $360,000. Accordingly, the maximum amount that the Company can contribute to your Roth 401(k) is $360,000 x 18% = $64,800. However, the sum of your individual contributions and Company contributions cannot exceed the 2026 annual IRS additions limit of $72,000.

Do I need to make an investment election for my Roth 401(k) NEC contribution?

Yes, you must update your future investment elections. You can do this by making an “all contribution” or a “Roth”-specific investment election. Otherwise, your contributions will automatically be invested in the Capital Group Target Date Retirement Trust closest to your estimated retirement age of 65.

Resources:

Retire Pilots – https://retirepilots.com

Get your FREE Retirement Toolkit – https://bit.ly/3ZmZsaX

Pilot Tax – https://pilot-tax.com/

The Pilot’s Advisor Podcast is also on video. Watch & Subscribe on YouTube: https://bit.ly/3EIEBW2

Connect with Pilot-Tax: https://pilot-tax.com/

Episode Transcription:

(Note, this is an automated transcription. Please forgive any errors.)

Ryan Fleming: We have Zach Smith, Pilot Tax on the podcast today, recording, uh, on a Saturday because of all the changes that Southwest made with their new NEC option. And there wasn’t a lot of training in advance and boom, on Friday they sent out an email with some, uh, some frequently asked questions or at least, you know, finally giving some guidance on it. And all that happened to me was uh, about 80, 80 pilots, 80 Southwest pilots all at once texting me, reaching out to me on Friday. So I thought it’d be appropriate for us to get a podcast together, get something out there to help our Southwest, uh, pilot clients and of those that aren’t, you know, clients, hopefully you get something out of this and if you’re not a client, maybe should figure out what, what, you know, why you’re not a client. Maybe you should be a client. So anyway Zach, thank you, uh, for going into the office so we could just talk about a few of these things and we really appreciate it.

Zach Smith: Oh, absolutely.

Ryan Fleming: Did you get any, uh, phone calls on Friday?

Zach Smith: There was a few in all last week. So this is, uh, this can be beneficial for a lot of folks.

Ryan Fleming: Okay, well, it’s, it’s early on, it’s a little bit complicated. We’re, we’re going to talk about uh, some of the things and I think the biggest thing is going to be just understanding how it works, how to make those changes on the Schwab website. Um, but big picture, some of the programming because of Secure, uh, you know, The Secure Act 2.0 is going to change how it works for the Southwest pilots. But the big picture thing that it really gives the option, which I personally love, is all these company contributions. Now you have the option to get them in your 401k plan as Roth money. Um, I know pilots like instant gratification, but I think paying a little uh, tax on a little bit now and letting it grow tax free for the rest of your life is an amazing thing. How do you, how do you view it?

Zach Smith: I completely agree. And this is uh, this is completely new. We haven’t seen this anywhere else yet where we have the option to have these company contributions roll in. You know, previously your contributions maxed at 30,000 with a catch up, uh, was all we could get in the Roth other than some of the other strategies that Ryan utilizes. But this allows almost all the money flowing into the 401k plan to be completely Roth. All post tax tax free growth, all the benefits we like.

Ryan Fleming: Well, I think it’s going to be an amazing thing if you choose to Take advantage of it. You can opt in, opt out each month, each month you can switch back and forth. I don’t know why you do that, but it is an option. Um, I think the big gotcha with this is two things. Number one, they don’t have it set up where it’s going to withhold for taxes on that if you select that Roth option. Um, so you need to get with your CPA and come up with a plan in advance, or else you’re going to get a nice big surprise on paying income tax on all those contributions that the company makes. Uh, Zach, how do you see that as like, how do you get ahead of that? How do you plan for that?

Zach Smith: Yeah, so, so I want to kind of run down this guys. So anytime you receive a benefit from the company, uh, generally it’s going to have to be taxed. So our understanding with the way that this is going to work, previously, uh, under pre tax contributions from the company, the company took a deduction when they gave you the money, but that money was going to have to be taxed at some point. Right. When you withdraw the money, what’s going to happen with these Roth is that the company still gets a deduction for employee benefits, but now this is going into a Roth account where it’s never going to be taxed again for the employee. So that’s a benefit to the employees. So the way that this is going to work is, our understanding is this is going to be another imputed income item for the pilots. So the money that goes into your 401k will be treated as income as you to you, just like your life insurance they pay for, just like your imputed travel. Um, but as Ryan said, they are not going to be withholding tax on this. Okay. So we could be talking about anywhere between 30 to $40,000 of additional income that we have no withholding on. Okay, so we need a plan for that. Right. Ryan and I had discussed a, uh, couple strategies. Right. One is maybe getting our pilots that choose to opt into this, which again, Ryan and I love this plan. Those that opt in, let’s look at withholding a little bit of extra out of your paycheck each month. Right. Let’s adjust the W4. Option B is we just need to prepare for a tax bill. Right. Come tax time, which I have no problem with with most of my clients. We just need to have that money set aside and we need to be ready.

Ryan Fleming: Yeah. And if you’re doing all the right stuff and you’re paying yourself first, hopefully you have an individual account or join a taxable account that is out there and growing. You let it grow all year long. And then when the tax bill comes around, well, Uncle Sam wants his cut. And that’s just the way it is. Um, a couple of other things that are changed. I’m going to share my screen just so we can look at these, some of these buttons together. I have a couple of screenshots because it is not intuitive like you think it would be. Um, you can see here under employer contributions, that is the button that’s going to switch, uh, it to Roth. If you wanted to actually do this. They put in, er, safe harbor, non elective, which I think makes it really confusing for the average pilot. But Southwest likes to make things confusing. They like to have it all over the place. Not all at Schwab. I mean, you got, you know, Empower Fidelity. I mean, they got stuff all over the place. It’s crazy. Anyway, so that’s the button that you’re going to push. The other thing to keep in mind is with the catch up deferrals, if you make over $150,000 a year now, that is going to be nothing but Roth. Okay? You don’t have the option anymore. Catch up is going to be Roth. Um, and also you’re not going to get any of your catch up unless you actually make your own contributions. A lot of pilots that don’t make those contributions, your catch up will never turn on until you max out the 24. 5 on the front end. Of course it was me. If it was me. And my advice would be that you make Roth contributions, you hit that 24. 5 catch up deferral starts going in there and you know, if you want to max that out. And then of course, the company contributions as, as well. Um, I, I, I’m sorry, but I think that getting that much Roth Money in your 401k every single year is, is just massive. Um, and, and I want to bring this up, I want to see if Zach has this same experience. But I’m amazed at how surprised pilots are in the distribution phase because they don’t understand it and they start taking money out of their 401k that’s all tax deferred. And then they realize how much tax they have to pay in retirement when they no longer have a job, then they don’t have a way to pay the tax bill. And now they need to take more money out of their 401k and it always seems to be a big surprise. Do you get that?

Zach Smith: We do. And I think this problem is going to exacerbate over the next few years with the contracts that the airlines have now. You know, the distribution phase has always been a problem. It is going to be a bigger problem as many of our clients start to age into retirement in the next 5, 10, 25 years. Uh, with the amount of money that’s going into these 401ks now with these new contracts, uh, it’s going to be a big shock. Right? It’s going to be a big shock. And this is what you and I try to help folks avoid. Uh, and this Roth tool that we have here that Southwest is offering is going to make a massive difference.

Ryan Fleming: Yeah, and I’m jealous. I mean, uh, you know, obviously you could do a Roth conversion, you know, anytime you want, but, uh, I could see the other airlines adopting this as time goes on. The airlines, you know, airline pilots are making plenty of money right now. And I think that just biting the bullet while you have income, paying the government to go away slowly over time is a much better strategy. And then you get that, that growth and that compounding growth later, big chunks. But guess what? You don’t owe Uncle Sam anything. I think this is definitely something to take advantage. Um, if you’re one of clients and you want help setting this up or you want to talk about it, obviously reach out to me, uh, for all those Southwest pilots that are listening, that aren’t clients. Well, you, you might want to check out and see what we’ve been doing.

Zach Smith: And I want to add to that Ryan. Um, you know, we work with a lot of pilots from all different airlines. And as a result, I do work with lots and lots of financial advisors across the country, probably work with Ryan more so than most. Uh, and I will say there’s a handful that, that I feel like understand and very few that really have their hands around it. And, and Ryan is 100% at the top of this list. Uh, I like working with Ryan. I like with my. When my clients choose to go with Ryan, his investment returns speak volume. And not only that, when Ryan and I are talking strategy has been demonstrated by the podcast here. We’re not, we’re not having to re. Educate each other on this stuff. We’re on the same page. Ryan’s got his hand around this stuff. So if you haven’t chatted with Ryan, I think, I think it’s worth a. I think it’s worth a conversation.

Ryan Fleming: I appreciate the shout out, Zach. I didn’t know that was going to be a part of it. But, but I, I also, I honestly don’t understand why pilots don’t take advantage. I mean, you get the free toolkit and, you know, just check out what you’ve done versus what we’ve done over the, over the past 10 years and just look at the numbers. I mean, the numbers don’t lie. I call it the IQ test. I say some people pass, some don’t. Uh, but looking at the net of fee numbers, you know, if you’re worried about paying a fee, well, guess what, we look at the returns after fees, so that’s all that matters, right? Um, so, you know, I, I appreciate the shout out, Zach, like I said, but, uh, I don’t know why you wouldn’t check it out. Um, any other que. We’re going to attach all the frequently, uh, asked questions for this to the podcast, so if you didn’t see that email, it should be attached. Um, if you have other questions, you could reach out. Do you think there’s any other gotchas that we haven’t brought up or talked about?

Zach Smith: I don’t think so. I think the good wrap up big picture here is, number one, this gives us a great tool to try to avoid that tax in retirement. Right. It helps that distribution phase tremendously. Number two, and we could talk all day about the benefits of the Roth. This also puts pilots in a great position for wealth transition to their kids legacy. This is something we’ve touched on before. So these, believe it or not, nobody wants to think about dying these large 401ks can create a tremendous tax problem for your beneficiaries. Okay. And this is something that helps to mitigate it. So, uh, your question, Ryan, Is there a gotcha? The gotcha is, look, guys, we’re going to have to pay tax on this, right? We’re going to have to pay tax on the front end. And by front end, I mean the year in which we opt into this plan. I think it’s a good move from the tax side. I don’t have a problem paying tax today to save money in the long term. I’ve, uh, told a lot of our clients, look, I’m in the tax acceleration strategy, right? Tax avoidance through tax acceleration. So this is, this is just another one of those vehicles. And I’m thrilled that you guys at Southwest have this.

Ryan Fleming: I agree. Uh, and I did think of another gotcha that we didn’t bring up is if you’ve never contributed to Roth before, you’re actually going to have to go into your change investments tab and actually tell them how to invest that Roth money. So if you haven’t done that, you need to do that, or else it’s just going to automatically get dumped in to a Target Date Fund, which. Don’t even let me start talking about that. If you want to see a difference in more efficiently investing your money, if you actually have your money in a Target Date fund right now, uh, you should definitely reach out to me right away. Um, but, yeah, just make sure. If you haven’t done any Roth contributions, you need to go and tell them under the. It’s a change investment, and then you got to go under your future investments and set something up. Um, Zach, it’s a Saturday. I pulled you away from your family. Thanks for going in the office so we can knock this out. Um, there’s a lot of. A lot of football to watch, and you need to get back to your family, so. So thank you for coming in, and happy, ah, New Year to everyone.

Zach Smith: Absolutely. Thanks, Ryan.

Ryan Fleming: All right, Take.

Molly Stillman: Information is for illustrative purposes only and does not constitute tax, investment, or legal advice. Always consult with a qualified investment legal, or tax professional before taking any action.