If you’re behind on your retirement savings, you got some welcome news in December when President Biden signed the SECURE 2.0 Act into law. The landmark legislation establishes a higher limit on catch-up contributions for people between 60 and 63 years old with workplace retirement plans.
The catch-up contribution provision is one of the dozens of new rules and regulations in the law aimed at helping Americans save more money for retirement and close a multi-trillion-dollar savings gap. Consider talking with a financial advisor if you’re playing catch-up with your retirement savings.
How Catch-Up Contributions Will Change
First introduced as part of the Economic Growth and Tax Relief Reconciliation Act of 2001, catch-up contributions were designed to help people 50 and older boost their savings in the years leading up to retirement.
While catch-up contributions to 401(k)s and similar employer-sponsored accounts were initially capped at $1,000, the limit has gradually increased over the years. In 2023, Americans ages 50 and older can save an extra $7,500 in their 401(k), 403(b), SARSEP or457(b) plans.
But catch-up contributions are set to change again. Starting in 2025, people between 60 and 63 years old will be eligible for a special catch-up contribution of either $10,000 or 150% of what the standard catch-up limit is for that year – whichever is greater. The $10,000 limit will then be adjusted for inflation annually, starting in 2026.
For example, if the standard catch-up contribution limit remains $7,500 in 2025, a person in his early 60s would be permitted to contribute an extra $11,250 to his 401(k) that year ($7,500 multiplied by 1.5).
Since some parents are forced to cut back on their retirement savings while raising their families, high-earning “empty nesters” stand to benefit the most from the change, says Kevin J. Brady, a certified financial planner (CFP) and vice president of Wealthspire Advisors. “With those children now out of the house or self-sufficient to some extent, those dollars can be redirected to catching up on saving for retirement,” he said.
Meanwhile, the standard catch-up contribution limit will remain in place for people between 50 and 59 years old, as well as those 64 and older.
The new catch-up contribution provision also only applies to people with 401(k)s and other workplace retirement plans. The change won’t affect individual retirement accounts (IRAs), although IRA catch-up contributions will be indexed to inflation starting in 2024 under a separate provision of the SECURE 2.0 Act.
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Another Change to Keep in Mind
While people in or approaching their 60s will need to keep the new catch-up contribution rule in mind, the law also affects how those contributions will be taxed.
Currently, catch-up contributions can be made to either traditional and Roth retirement accounts. Starting in 2024, however, people who earned more than $145,000 in the previous calendar year will no longer be eligible to make catch-up contributions on a pre-tax basis.
Instead, these savings will be taxed before they go into a person’s retirement account, making them Roth contributions. But this change shouldn’t dissuade you from making catch-up contributions, Brady says.
“Depending on wages, (you) might not get as big of a tax savings up front given the requirement that these catch-up contributions be Roth/after-tax, but (it’s) still an opportunity to save more dollars in a tax-free bucket for future use,” he said.
Then again, this provision will only impact people who earned more than $145,000. Those who made $145,000 or less in the previous calendar year will retain the ability to make catch-up contributions on either a pre-tax or Roth basis.
Bottom Line
Catch-up contributions were established more than 20 years ago to help Americans save more as they approach retirement. Under a change made in the SECURE 2.0 Act, 401(k) catch-up contributions for people ages 60 to 63 will increase in 2025 to $10,000 or 150% of the regular catch-up amount – whichever is greater. Starting in 2024, the landmark retirement law will also require all catch-up contributions be made with after-tax dollars for people who earned over $145,000 the year before.
Retirement Savings Tips
In 2023, the IRS allows you to contribute up to $22,500 to a 401(k) or similar workplace retirement plan, plus an extra $7,500 for people 50 and older. SmartAsset’s retirement calculator can help you estimate how much money you’ll need to save for retirement so you can assess your progress.
From building reliable income streams to limiting your tax liability, retirement planning can be complicated. A financial advisor can help you navigate the complexities of this important process. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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