Individuals who are age 50 or older will soon have new opportunities to save more for retirement. The SECURE 2.0 Act brings changes that will allow for higher catch-up contributions to retirement plans. The amount you can set aside for retirement will depend on your age, income and type of retirement account.
The changes for 401(k) and IRA catch-up contributions include:
- A higher 401(k) catch-up limit for those ages 60 to 63.
- A higher SIMPLE catch-up limit.
- The IRA catch-up limit will be indexed for inflation.
- High earners will need to make catch-up contributions to a Roth account.
A Higher 401(k) Catch-Up Limit at Ages 60 to 63
If you are at least age 50 you can make catch-up contributions to your 401(k) plan. In 2023, the 401(k) contribution limit is $22,500 and the catch-up contribution limit is $7,500. If you are 50 or older, you can defer paying income tax on $30,000 in your 401(k) plan.
Beginning in 2025, the SECURE 2.0 law increases the catch-up contribution limits for certain ages. Those who are age 60, 61, 62, or 63 will soon be able to set aside more money in a 401(k) plan. The catch-up limit will be $10,000 or 150% more than the regular catch-up limit in 2025 for those ages 60 to 63. The higher catch-up contribution limit will be indexed for inflation after 2025.
If you’ve saved steadily for decades, the chance to set aside more in your early 60s could help boost your nest egg. “Increasing the 401(k) savings limits for years that could be your highest earning years may allow you to save a little extra for retirement,” says Gillian McCarthy, a financial planner at Great Oak Wealth Management in Pottstown, Pennsylvania. “However, the window from 60 to 63 is a narrow time to allow for supercharging your 401(k) deferrals.”
The overall impact could be limited for those who haven’t been able to contribute consistently to a retirement account. Planning now might give you time to create a long-term approach for your 401(k) plan.
A Higher SIMPLE Catch-Up Limit
The SIMPLE IRA contribution limit is $15,500 in 2023, and the catch-up contribution limit is $3,500 for those 50 and older. The SECURE 2.0 Act increases the annual deferral limit and catch-up contribution by 10% for employers with 25 or fewer employees beginning in 2024. Employers with 26 to 100 employees will be eligible for increased deferral limits if the employer provides higher contributions to the account.
The higher limit could be seen as a relief to those looking for ways to save more. “Taking advantage of catch-up contributions can be crucial to help get one’s retirement savings back on track, particularly if they struggled to get off on a good path earlier in their career,” says Scott Jensen, a financial planning consultant at COUNTRY Financial in Queen Creek, Arizona. “Not only can it help inflate retirement account balances, but it offers a way to reduce the taxable burden older workers might be facing with fewer deductions, since many will no longer have children in the home and many may have also paid off their mortgages.”
IRA Catch-Up Limit Tied to Inflation
The catch-up contribution limit for IRAs is currently $1,000, and the amount is not tied to inflation. That is set to change under the new SECURE 2.0 Act rules. The IRA catch-up contribution limit will be indexed for inflation starting in 2024, and annual adjustments will be made to the limit in increments of $100.
“Historically, the IRA catch-up limit for those over 50 was a flat $1,000,” McCarthy says. “Now savers will need to keep track of the limit as it increases over time to ensure they are maximizing their savings.”
High Earner Catch-Up Contributions to a Roth
The SECURE 2.0 Act has provisions that will impact how high earners can save for retirement. Beginning in 2024, if you earn more than $145,000 each year and are age 50 or older, your catch-up contributions must be made as after-tax Roth contributions.
“Retirement savers may or may not benefit from the rule to implement mandatory Roth catch-up contributions,” McCarthy says. “The consequence will be dependent on their tax situation and their tax strategy.”
Roth contributions are taxed differently than traditional retirement plan contributions. “Roth contributions allow you to pay taxes now and avoid taxes on the growth,” says Zack Swad, president of Swad Wealth Management in Santa Rosa, California. “This is different than a pre-tax contribution, which gives you a deduction today, but requires you to pay taxes later when you make distributions.”
For individuals with an income above $145,000, the requirement to use a Roth option for catch-up contributions could have advantages and drawbacks. “While the changes allow people to contribute more, this change will force high earners to pay more tax today for the ability to do so, potentially when they are in a higher tax bracket than they might be in retirement,” Swad says.
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