Nov 21, 2024
Are you 60 to 63 years old? Then the IRS has some exciting news for you: you’ll soon be allowed to sock away more for retirement.
The IRS recently announced a much higher catch-up allowance when contributing towards employer retirement plans, including 401(k)s. This amount is almost double the “regular” catch-up contribution is for those aged 50 and up.
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Sure, it’s exciting to be able to contribute more pre-tax dollars towards your golden years. However, some experts have raised a red flag: it doesn’t help everyone. Here’s more.
The intel on catch-up contributions
Each year, the IRS releases updated guidance on how much individuals can contribute to their 401(k)s. In addition to the standard amount, anyone who’s at least 50 years old can contribute additional funds. For 2024 and 2025, that amount is an additional $7,500 within the calendar year.
Starting in 2025 — thanks to the passing of SECURE 2.0 Act back in 2022— those aged 60 to 63 are allowed a “super” catch-up contribution of up to $11,250. As in, those who have qualifying employer-sponsored plans (and fall within that age range in the calendar year) will be able to contribute an extra $3,750 to their 401(k)s.
With the super catch-up contribution, you’ll be able to put aside a total of $34,750.
The aim of boosting these catch-up contribution limits is to help older Americans getting close to retirement age squirrel away more money before leaving their careers behind.
For the Americans who couldn’t afford to set aside as much earlier in their career, whether because they weren’t earning enough or other priorities like children took precedence, this is a golden opportunity.
And many may need the additional help considering that, as of 2019, just over 1-in-3 workers between 55 and 64 years old lacked access to an employer-sponsored retirement plan, according to the Economic Policy Institute (EPI).
But take note: this “supercharged” saving option is a limited-time offer. Once you turn 64, your limit returns to the regular contribution amount. In 2025, that’s $31,000.
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The challenges with catch-up contributions
Considering the EPI research shows those between 55 and 64 tend to have around $10,000 set aside in retirement funds, super catch-up contributions could be massively useful for many of those workers. Even more so if they don’t have benefits like pension plans or another regular source of income during retirement.
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The problem? This “solution” doesn’t really help most people.
The extra amount allotted tends to benefit higher income earners who are already putting away the maximum amount (or close to it) in their 401(k)s. Even if you earn six figures, that amount is more than a third of what you earn.
Is that a realistic savings amount for many? Probably not. Many still have other financial obligations, like mortgage payments, transportation costs and other daily expenses. Since 57.2% of employees nearing retirement contribute to a 401(k), according to the same EBI report, it could mean not as many take advantage of the catch-up contribution anyway.
It’s still possible to set aside money to live out a comfortable retirement even if you aren’t a high income earner, can take advantage of catch-up contributions, or live paycheck to paycheck. Investing whatever amount helps.
One way to find more money to set aside for retirement is to take a careful look at your expenses. See where you can cut back, like negotiating to pay a lower internet bill or shop around insurance providers to find a cheaper premium. Once you free up some extra funds, use that to increase your contribution amount.
Finding ways to increase your income, whether it’s negotiating for a raise or earning money through a side hustle, can also help you make additional contributions. Work to either find more savings or earnings and gradually put away more in your 401(k).
Whichever way you go about it, it’s crucial you have a solid plan to make retirement savings one of your main priorities no matter what age you are.
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Sarah Li-Cain, AFC is a finance and small business writer with over a decade of experience.
