Starting to save for retirement is one of the most crucial things an employee can do. They must determine which tactics will be most effective for them in order to accomplish this.
For this reason, we advise that anytime the Internal Revenue Service (IRS) makes changes to the way employees save money for the future, they examine the modifications to see whether there is anything more they can do.
The IRS is gradually implementing the many new regulations brought about by the 2022 SECURE 2.0 Act to assist those who wish to increase their retirement contributions.
Employer retirement plans, including 401(k)s, are now subject to new regulations. The most intriguing change is that employees between the ages of 60 and 63 can now make larger contributions.
The new IRS rule on catch up contributions
Since those over 50 have been able to save more for retirement for years, some people might not consider that news. This is referred to as a catch-up contribution, and it amounts to an additional $7,500 annually for 2024 and 2025.
But now there’s another layer. People between the ages of 60 and 63 can get up to $11,250 through what is known as a special catch-up contribution. After this, employees whose companies offer qualifying plans can contribute an additional $3,750 to their 401(k)s. By 2025, these workers will be able to save $34,750 in addition to their regular contributions.
By allowing them to save more before they retire, the larger catch-up contribution limits are intended to assist older Americans who are approaching retirement.
For those who were unable to begin saving sooner due to insufficient income or other financial commitments, such as childrearing, this is an excellent opportunity.
According to the Economic Policy Institute (EPI), as of 2019, almost one-third of workers between the ages of 55 and 64 lacked access to an employer-sponsored retirement plan, making such measures imperative.
However, the better option to save is only available for a limited period of time. The contribution cap returns to the standard amount of $31,000 in 2025 when you become 64.What makes making catch-up contributions challenging?
Will this be a helpful solution for most?
Unfortunately, it might not be. Only those who can spare the additional funds will be able and willing to save this larger amount of money.
Everyone needs to increase their retirement savings, so it’s okay that those who would do so have likely been contributing the maximum amount to their plan for years. The issue arises when we consider those who are unable to contribute even the initial sum, much less more.
The EPI research we previously discussed indicates that 57.2% of employees nearing retirement make contributions to a 401(k). This indicates that over 40% of this workforce doesn’t contribute at all, much less significantly than a tremendous catch-up contribution.
Additionally, many individuals who do contribute to employer-sponsored retirement plans are unable to boost their contributions since they already have to cover their everyday expenses, such as their mortgage and auto payments.
In order to avoid becoming overly dependent on Social Security after retirement, it is crucial for those who are able to do so to continue contributing as much as they can to their retirement accounts, including these additional catch-up contributions, even though the new rule may not help all Americans save the most for retirement.
If you are unable to save a large sum of money for retirement, invest some to help it grow. In order to save at least some money, you should also endeavor to reduce your expenditures.
Note: Every piece of content is rigorously reviewed by our team of experienced writers and editors to ensure its accuracy. Our writers use credible sources and adhere to strict fact-checking protocols to verify all claims and data before publication. If an error is identified, we promptly correct it and strive for transparency in all updates, feel free to reach out to us via email. We appreciate your trust and support!
Eliot Pierce is a dedicated writer for ChiefsFocus.com, covering local crime and finance news. With a keen eye for detail and a passion for storytelling, Eliot aims to provide his readers with clear and insightful analysis, helping them navigate the complexities of their financial lives while staying informed about important local events. His commitment to delivering accurate and engaging content makes him a valuable resource for the community.