Catch-Up Contributions To Your 401(k) Can Now Be Supersized

Supersized meals may be a thing of the past. But starting this year, supersized catch-up contributions are the newest perk for savers in 401(k)s and other employer-sponsored retirement plans.

↑
X

NOW PLAYING
Want To Add $179,057 To Your Social Security Benefits? Use This Retirement Strategy

But there’s a catch: Eligible workers must be between the ages of 60 and 63 to take advantage of this new rule. Eligibility is based on the employee’s age at the end of 2025. The higher contribution levels for savers in their early 60s is the federal government’s way of helping close the retirement savings gap.

“It gives people close to retirement a chance to give their accounts an extra savings boost,” said Tim Steffen, director of advanced planning at Baird Private Wealth Management.

Time To Up Your Catch-Up Contributions

Saving more in a tax-deferred retirement account is also a chance for those who are behind on their savings to close their personal retirement savings gap, adds Steffen.

Thanks to a provision in the Secure 2.0 Act of 2022, employees aged 60 to 63 can sock away more for retirement than the existing catch-up contribution that’s been available for workers 50 or older since 2001.

The additional catch-up amount is equal to 50% of the 50+ catch-up limit. For 2025, the super catch-up contribution is $3,750. Those extra dollars are on top of the regular catch-up limit of $7,500.

Michael Rosner, managing director at Raymond James (RJF), uses an analogy of a biker riding an e-Bike up a mountain in Aspen, Colo., to drive home the value of super catch-up 401(k) contributions.

“You’re close to the top of the hill, and you’ve been riding for a long time (and are gassed), and you remember that you’re riding an e-Bike,” said Rosner. “And you hit the (extra) gear and suddenly it makes pedaling up the mountain so much easier. So, yeah, those extra dollars invested by someone in their early sixties can make a big difference when the money is compounding for 10 or 15 years.”

Up To $11,250 In Catch-Up Contributions

Starting in 2025, employees age 60 to 63 in retirement plans such as 401(k)s, 403(b)s and government 457(b)s, can set aside $11,250 in total catch-up deposits. When you add that to the $23,500 regular 401(k) maximum contribution, it brings the total retirement savings contribution limit for savers in this age band to $34,750.

Participants in Simple IRA plans, which are typically offered by small employers, are also eligible. For these accounts, the enhanced catch-up is $1,750, bringing the total contribution limit to $21,750 for this type of plan.

Jonathan Lee, investment portfolio manager, at U.S. Bank Private Wealth Management, recommends savers that are eligible for the enhanced catch-up contribution take advantage of the extra savings option.

“It is a good development,” said Lee. “You have to be pretty intentional (since it’s a four-year span). Plan ahead so you can execute it in a timely fashion.”

Bolster Your Retirement

Being able to save more in a tax-deferred account is a way to fortify a retirement account in the later years of one’s working life. It’s also a way for folks nearing retirement to reduce their tax bill, as contributions to these accounts are on a pretax basis which lowers taxable income.

A saver age 60 to 63 who maxes out his 401(k) and takes full advantage of the super catch-up contribution can save a total of $34,750 in 2025. A worker in the 22% tax bracket could reduce his or her tax bill by $7,645 by taking the full deduction.

“Reaching any financial goal is going to be easier if you are able to reduce hurdles,” said Lee. “And you are able to get a bigger tax deduction when you make the enhanced contribution.” Plus, your contributions grow tax deferred until you withdraw the money in retirement.

Go On Autopilot With Catch-Up Contributions

Plus, there’s no doubt that saving in a 401(k) is easy and putting your savings on autopilot is a winning strategy, adds Steffen.

“Employer-sponsored retirement plans are really convenient,” said Steffen. “You just turn it on, and you never really see the money because it’s taken right out of your paycheck. You might not have to do anything to take advantage of this, other than continuing to withhold money until you’ve hit the higher catch-up limit.”

Saving an additional $3,750 a year for four years won’t change your life like winning the lottery would. But the dollars can add up. Assuming an 8% annual return, the $15,000 extra investment over four years would grow to $23,352. And that balance will balloon to $50,415 over the next 10 years if you earn an 8% return each year.

Fifty thousand bucks might not be a life-changing number, but it can help pay the bills in retirement.

Look At The Big Picture

Still, like any personal finance decision, you must decide whether investing the additional dollars into your retirement account via a super catch-up contribution is the right thing to do in the big picture, Lee adds.

For example, if you don’t have a rainy-day fund set up or you’re already having trouble making ends meet each month with your existing cash flow, you probably are better off not contributing more to your retirement account, Lee says.

“If it’s not within your budget, don’t do it,” said Lee. If you’re a little tight on cash but think rearranging your budget a tad can make the extra savings doable, then go for it.

Mind Your Cash Flow With Catch-Up Contributions

What if you’re between 60 and 63 and have the free cash flow to contribute the max to your retirement account, but don’t end up needing the extra money? You can always leave it to heirs, adds Rosner.

“That’s extra money that’s going to be left for kids, grandkids or charities,” said Rosner.

Steffen notes that 401(k) savers who take advantage of catch-up contributions should be aware of a rule change that takes effect in 2026. Beginning next year, certain employees whose earnings exceed a yet-to-be determined threshold must make their catch-up contributions to a Roth-styled retirement account offered by their employer.

Unlike traditional 401(k)s you fund with pretax dollars, you fund Roth accounts with after-tax money from your paycheck.

“This means those catch-up contributions will no longer be tax-deductible the year of the contribution, but all future growth on contributions can be withdrawn tax-free in retirement,” said Steffen.

Enhanced Catch-Up Contributions For 401(k), 403(b) And 457 Plans

Source: Baird Private Wealth Management

YOU MAY ALSO LIKE:

Meet The Guy Who Runs A Massive $2.7 Trillion Bond Portfolio

Inspirational Quotes: Columbus Short, Sam Rayburn And Others

IBD Digital: Unlock IBD’s Premium Stock Lists, Tools And Analysis Today

Find Winning Stocks With MarketSurge Pattern Recognition & Custom