In 2025, workers will benefit from a significant increase of 401(k) contribution limits. Plus, they’ll finally be able to catch up and defer as much as $23,500 into their retirement plans! The Secure 2.0 Act of 2022 makes big moves in this direction. It helps older employees save more by letting them make catch-up contributions. Workers 50 and older can increase their contributions by an additional $7,500. In the meantime, 60- to 63-year-olds will get to benefit from a raised catch-up limit of $11,250.
The changes to catch-up contributions are a clear example of a larger trend in retirement planning. It means that by 2024, almost all retirement plans will have this option. In 2021, only 16% of eligible workers took advantage of catch-up contributions at all that year. You can do catch-up contributions either as traditional contributions or as after-tax Roth contributions. The best option for you is based on the details of your 401(k) plan. This choice allows individuals to tailor their retirement savings strategy based on their current tax situation and anticipated future tax brackets.
For high earners, and especially for those making $150,000 or more, these tweaks are indispensable. Starting in 2026, employees making over $145,000 from their employer in the prior year will have to contribute any catch-up contributions as after-tax Roth contributions. That will have a huge impact on how they control and invest their retirement savings. This major shift would render many of the tax benefits tied to traditional pretax contributions moot.
Patrick Huey, a financial planner, stressed the need for planning in the face of these developments.
“Now is the time to work with your advisor or tax preparer to run multi-year tax projections.” – Patrick Huey
According to TSF’s 2025 Vanguard report, there are almost 5 million active participants. Indeed, the impact of these modifications will be massive. Workers can choose to accelerate their pretax catch-up contributions through 2025 or opt for Roth contributions sooner if they prefer. This flexibility is especially important for those moving through all of life’s complicated financial circumstances.
The choice between traditional and Roth catch-up contributions deserves thoughtful evaluation of one’s personal financial situation. Tax deduction Returning to Roth vs. Although that means the funds are not tax-free, in the long run, for many individuals that may work out in their favor since the funds grow tax-free.
As these changes approach, workers need to be on the frontlines of educating themselves. They are urged to reach out for expert advice to make the most of their retirement savings options. As the world of retirement planning continues to change for all Americans, making educated decisions becomes even more important as people spend their working years saving for retirement.