Significant changes made to catch-up contributions under the SECURE 2.0 Act. These changes aim to boost retirement savings for workers closer to retirement and provide much-needed flexibility.
Increased Catch-Up Contribution Limits
Starting in 2025, the catch-up contribution limits for employees aged 60-63 in 401(k), 403(b), and governmental 457(b) plans will be increased to the greater of $10,000 or 50% more than the regular catch-up amount in effect for that year.
For example, if the regular catch-up amount for 2025 is $7,500 (projected based on current limits), those aged 60-63 could contribute up to $11,250 ($7,500 + 50% of $7,500) as a catch-up contribution.
This increased limit will be indexed for inflation after 2025, potentially allowing even higher catch-up contributions in subsequent years for this age group.
Catch-Up Contributions as Roth
Another significant change is the ability to make catch-up contributions as Roth contributions, starting in 2024. Previously, catch-up contributions had to be made on a pre-tax basis.
By allowing Roth catch-up contributions, employees can potentially reduce their tax burden in retirement by paying taxes on those contributions upfront. This change provides more flexibility in managing retirement income and tax planning.
Implications for Retirement Savings
These changes to catch-up contributions are expected to have a substantial impact on retirement savings for older workers. The increased limits will allow those nearing retirement to supercharge their savings efforts, potentially making up for any shortfalls in earlier years.
Additionally, the option to make Roth catch-up contributions can be a powerful tool for tax planning, especially for higher-income individuals who may face higher tax rates in retirement.
It's important to note that employers will need to amend their 401(k) plans to accommodate these changes, and employees should consult with financial advisors to determine the best strategy for maximizing their catch-up contributions based on their individual circumstances.
Overall, the SECURE 2.0 Act's changes to catch-up contributions represent a significant step forward in helping workers closer to the end of their careers better prepare for a secure retirement.
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