Since saving for retirement is one of the most important endeavors that a worker can embark on, it is important to know which strategies will serve them best. This is why every time the Internal Revenue Service (IRS) introduces updates to the way workers put money away for the future we suggest evaluating the possibility of utilizing it and doing more.
The passing of the SECURE 2.0 Act back in 2022 brough on a slew of new policies that the IRS is slowly implementing to help those who wish to contribute more to their retirement to be able to do so. There are new rules regarding employer retirement plans, including 401(k)s. but perhaps the most interesting one applies to workers between the ages of 60 and 63 years old, who will now be able to increase their contributions.
The new IRS rule on catch up contributions
Some may think that is not news, after all for years those 50 and over have been able to put away more money into their retirement, calling it a catch up contribution (for 2024 and 2025, that amount is an additional $7,500 within the calendar year).
But now there is an extra layer, called a “super” catch-up contribution of up to $11,250 available for those 60 to 63. This means that for those with qualifying employer-sponsored plans an extra $3,750 to their 401(k)s can be deposited. When adding to that the normal contribution amount, these workers will be able to save a total of $34,750 in 2025.
The expanded catch-up contribution limits aim to support older Americans nearing retirement by allowing them to save more as they prepare to leave the workforce. For those unable to prioritize savings earlier due to low earnings or competing financial demands like raising children, this presents a valuable chance to strengthen their retirement funds.
The need for such measures is significant, as according to the Economic Policy Institute (EPI), over one-third of workers aged 55 to 64 lacked access to an employer-sponsored retirement plan as of 2019.
However, this enhanced saving option is temporary. Once you reach 64, the limit reverts to the standard contribution cap, which is $31,000 in 2025.The challenges with catch-up contributions
Will this be a helpful solution for most?
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Regrettably, potentially not. Since this is a higher amount of money to put away, only those who can spare the income will be able and willing to put it away, and those who would do so are likely to have been contributing the maximum amount to their retirement plan for years already (this does not make it a bad policy for them, as everyone needs more retirement savings). The problem comes when we consider those who are unable to contribute the original amount let alone an extra contribution.
The previously mentioned EPI report found that 57.2% of employees nearing retirement contribute to a 401(k), which still leaves more than 40% of this portion of the workforce without any contribution at all, let alone a super catch up contribution. And between mortgage payments, transportation costs and other daily expenses many that do contribute to employer sponsored retirement accounts cannot spare any more money to supersize these contributions.
Even though the new rule may not be the most effective in helping all Americans save for retirement it is still important for all those who can to continue contributing the maximum possible amounts to their retirement accounts, including these super catch up contributions, so as to be as independent as possible from Social Security during retirement.
If you cannot contribute a lot to retirement, try to invest some money to help it grow and try to downsize your expenses to be able to put away at least some amount of money.