Saving for retirement can be quite tricky in today’s volatile economy. Even though there are many options to do so, most budgets are stretched thin and any money that comes in Is usually allocated to more pressing issues. Most people do this with the confidence that their retirement savings will be taken care of by their employer, as most people nowadays have a mandatory 401(k) plan with their company, and the lucky ones even get an employer contribution match!
The problem with this system is that many workers do not have their plans properly set up with contributions that match their salary or the expectations for a good retirement. This all changed when the Secure Act 2.0, which was enacted by Congress in 2022, introduced a range of updates to the retirement system, one of the biggest changes being higher catch-up contribution limits for 401(k) plans. This new rule is designed to help older workers increase their retirement savings as they near the end of their careers.
According to a CNBC survey, which polled roughly 6,700 adults in early August, about 4 in 10 workers are behind in retirement planning and savings. This is not a great statistic, especially considering the potential shortfall of the Social Security Trusts, but the Secure Act 2.0 can potentially help remedy some of these issues. Thanks to the act, workers who are at least 50 years old can make extra contributions to their 401(k) plans, which allows them to set aside more money than the standard limit and from 2025 onwards, workers aged 60 to 63 can increase their annual 401(k) catch-up contributions to $10,000 or to 150% of the catch-up limit, whichever number is higher to help boost their savings.
What higher 401(k) catch-up contributions mean for workers
Certified financial planner Jamie Bosse, senior advisor at CGN Advisors in Manhattan, Kansas expressed his appreciation for this new plan “This can be a great way for people to boost their retirement savings.”
And depending on your contributions, the boost can be quite significant. Employees will now be able to funnel up to $23,000 into their 401(k) plans for 2024, and for workers age 50 and older, they can now add an extra $7,500 to give them an even bigger boost.
Regrettably not all eligible workers are taking advantage of these catch-up contributions, in fact, few are. According to Vanguard’s 2024 How America Saves report only about 15% of eligible workers made catch-up contributions in 2023, and those who did already qualify as high earners. To be fair, with the current economic climate, even higher earners could still face problems in retirement if they have not accrued a reasonable nest egg, and these extra contributions allow them to direct and allocate the funds so as not to spend them. In fact, according to the Vanguard report “More than half of 401(k) participants with income above $150,000 and nearly 40% with an account balance of more than $250,000 made catch-up contributions in 2023”
The 2025 catch-up contribution limit has not yet been announced, but it stands to reason that the limit will go up to allow for better savings potential.
Roth catch-up contributions
Another change introduced by the Secure Act 2.0 affects how these extra contributions are taxed. Currently, workers making catch-up contributions can choose to make their deposits in either pretax or after-tax (Roth) accounts, but in 2026 that rule will change. Those earning more than $145,000 from a single company the prior year will have to make their contributions to after-tax (Roth) accounts, 401(k), 403(b) or 457(b) plans.
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This means that workers still have an extra year to make their pretax catch-up contributions to maximize their savings before the new rule enters into effect.
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