Maximizing your retirement savings through a 401(k) is about to become even more advantageous in 2025.
As the new year rolls in, certain employees will have the opportunity to increase their 401(k) contributions. This adjustment will lead to more tax savings in 2025 and further tax-free growth over the years.
This change stems from the SECURE 2.0 Act passed in 2022, which will be implemented starting January 1. The act introduces a higher limit for catch-up contributions in 401(k) plans, although this benefit is targeted at a specific group of investors.
Here’s a breakdown of who will benefit and how much they can contribute starting in 2025.
The Enhanced Catch-Up Contribution
The SECURE 2.0 Act revises the rules for catch-up contributions for those participating in 403(b), 457(b), and 401(k) plans. This provision is for individuals who are turning 50 or older within the year, allowing them to contribute more than the usual limits of these plans.
In 2025, the normal catch-up contribution limit for 401(k) plans will be $7,500. This means that eligible individuals can contribute a total of $31,000 to their employer-sponsored retirement plan.
Under the SECURE 2.0 Act, the catch-up limit for certain employees will increase to $10,000 or 150% of the standard catch-up amount, whichever is higher. Since 150% of $7,500 amounts to $11,250, this will be the new catch-up limit in 2025 for eligible investors.
However, this enhanced catch-up contribution is only available to those aged 60 to 63 at the end of the year. If you’re turning 64 in 2025, unfortunately, you do not qualify. But if you’re about to hit 60, you’ll have four years to make these larger contributions to your 401(k).
Is it Worth Taking Advantage of Increased Catch-Up Contributions?
401(k) plans might not always be the top choice for retirement savings due to potentially high fees and investment limitations. However, for those eligible for the increased catch-up contributions, there’s a compelling reason to maximize this opportunity, especially in 2025.
Individuals in their early 60s are often at their peak earning stages, even when accounting for inflation. Contributing to a 401(k) at this time allows them to defer taxes at their current high-income tax bracket, which could be beneficial despite the fees associated with 401(k) plans.
Starting in 2026, another aspect of the SECURE 2.0 Act will require individuals earning above a certain threshold to make their catch-up contributions to a Roth 401(k). The income threshold for this rule is set at $145,000 as of 2023.
While Roth accounts offer benefits, they might not be as attractive for those at higher income levels, particularly if the associated 401(k) fees are steep. However, if the funds can be swiftly transferred to a Roth IRA without fees, the scenario becomes more appealing. Generally, funds in a Roth account provide more tax benefits than those in a taxable account for individuals over 59 1/2, the age at which Roth earnings can be withdrawn tax-free and without penalties.
Ultimately, those in their early 60s with the capacity to save more should consider leveraging the higher catch-up contribution limit in 2025. Following years might still offer valuable opportunities for catch-up contributions, though perhaps not as lucrative.
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Passionate about analyzing economic markets, Alice M. Carter joined THE NORTHERN FORUM with a mission: to make financial concepts accessible to everyone. With over 10 years of experience in economic journalism, she specializes in global economic trends and US financial policies. She firmly believes that a better understanding of the economy is the key to a more informed future.
