Could someone in those age groups really save up to $34,750 – or the price of some compact SUVs – for retirement next year in a 401(k)? Yep, that’s the newly released, mind-blowing Max. Of course, you may have to skip some trips to the grocery store, ditch vacation plans, and avoid sports betting or midnight shopping online to achieve this.
Why are we suddenly talking about such large numbers? That’s because a new hyper-targeted passing limit will go into effect early next year, thanks to an obscure change in the SECURE 2.0 law. Significant revisions to retirement savings rules were packaged into SECURE 2.0, which was signed into law by President Joe Biden in late 2022 as part of a $1.7 trillion omnibus spending package.
Those just entering retirement may be happy to hear that they have a way to put even more money into their savings.
Savers ages 60, 61, 62 and 63 who participate in these plans at work starting in 2025 will have a significantly higher catch-up contribution for 401(k) plans.
For example, if someone is 59 in March but turns 60 in September 2025, they can contribute up to a maximum of $34,750 to a 401(k) plan in 2025, according to the IRS.
For 2025, the higher catch-up contribution limit applicable to this age group is $11,250. That’s $3,750 on top of the regular catch-up limit of $7,500 that applies in the year a saver turns 50. Catch-up contributions for those over 50 have long been a way for some who could save more to get an extra boost. a boost in their later working years.
We’re talking about savers who participate in most government 401(k), 403(b), 457 plans and the federal government’s Thrift Savings Plan.
In early November, the Internal Revenue Service introduced its new updated limits for retirement savers in 2025.
To start, individuals can contribute up to $23,500 – an additional $500 over the 2024 limit – to their 401(k) plans in 2025, according to the IRS announcement. The basis applies to both younger savers and older employees.
Those just around the corner from retirement will have a way to put more money into their savings pot. Savers ages 60, 61, 62 and 63 who participate in these plans at work starting in 2025 will have a significantly higher catch-up contribution for 401(k) plans.
Catch-up contributions can help you save even more than the original limit if you qualify. There is therefore a maximum catch-up contribution of €7,500 for one group of older employees. And there is a maximum catch-up contribution of $11,250 for any other group.
The total possible contribution allowed in a 401(k) plan is $34,750 for individuals ages 60 through 63 in 2025.
The maximum allowable savings in a 401(k) is $31,000 in 2025 for other workers ages 50 through 59, and then 64 and older. The catch-up contribution for that group will remain $7,500 for 2025.
Yes, people will definitely be confused. We’re talking about a brand new rule here – and one that applies to some people but not to others.
Kirsten Hunter Peterson, vice president of workplace thought leadership at Fidelity Investments, said we are looking at a change that is permanent.
“For example, if you are 56 years old today, you can expect to have the opportunity to save up to the higher dollar threshold when you reach age 60,” said Hunter Peterson.
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Your employer should offer these new, super-sized catch-up contribution limits to their employees next year. But Fidelity expects that the majority of plan sponsors could provide the increased catch-up, based on discussions with plan sponsors.
Another twist lies ahead for some higher-paid executives, executives and others. Starting in 2026, employees who earn $145,000 or more each year would have to put their catch-up contributions into a Roth. By contributing to the Roth, these employees would not receive a tax benefit for those additional contributions.
From 2026, higher-paid workers would eventually have to pay taxes in advance on some extra pension savings set aside under catch-up provisions at a time when they generate the most taxable income.
The Roth requirement applies to the existing catch-up contributions for savers aged 50 and over, as well as the new “super” catch-up contributions for savers aged 60 to 63 in that higher income group, Hunter Peterson said.
While you work, you don’t get an upfront tax benefit on the contributions you make to a Roth 401(k) each year, as you would with a traditional 401(k). The traditional 401(k) has tax-deductible contributions, but you’re stuck with taxable withdrawals.
This year, the Roth 401(k) option became more attractive based on another change in the SECURE 2.0 Act. Beginning in 2024, required minimum distributions will no longer be required for Roth 401(k)s. If you don’t need the money, you don’t have to withdraw it in your 70s and you can continue to grow it tax-free.
But honestly, who can be expected to save $34,750 for retirement next year in their early 60s?
“You’d be surprised: It’s not always the people who make the most money who can save so much,” says Melissa Joy, president of Pearl Planning, a wealth advisor at Dexter.
Yes, she acknowledged that the “high-paid supersaver will always be looking for an opportunity and will likely have the ability to save even more.”
But someone who has few bills and little debt — someone who has already put their children through college — also has a chance to save more for retirement than some might expect.
“If you’re a disciplined saver who has paid off debt or perhaps has a low-interest mortgage, you may be able to max out even if you make around $100,000,” Joy said.
“Some people have experienced a lot of income growth along with the pain of inflation, and they are a perfect group to save more,” she said.
At the same time, Joy acknowledged, she has seen other families who always max out their retirement savings each year but, honestly, had to give themselves more breathing room as they got older and faced additional pressures of having to send their children to college or had to take care of their children. aging parents.
She has advised some to “take the foot off retirement savings to allow some extra room in the budget for their family’s current needs, even if they have a higher income.”
Contact personal finance columnist Susan Tompor: stompor@freepress.com. Follow her on X (Twitter) @tomorrow.
This article originally appeared on Detroit Free Press: 401(k) catch-up limits in 2025 will allow bigger contributions for some
