Transforming from age 60 to 63 in 2025? Potential Large 401(k) Adjustment May Increase Your Retirement Wealth Significantly.
Transforming from age 60 to 63 in 2025? Potential Large 401(k) Adjustment May Increase Your Retirement Wealth Significantly.
There's an advantage to saving for retirement in a 401(k) plan compared to an IRA. A 401(k) allows for larger annual contributions and, if fortunate, a workplace match could boost your retirement savings.
The contribution limits for 401(k) plans can vary from year to year. As of now, 401(k)s max out at $23,000 for workers under 50 and $30,500 for those 50 and above due to a $7,500 catch-up. This limit will remain the same for 2025, but the limit for those under 50 will increase by $500 to $23,500. This means that those 50 and above can contribute up to $31,000 to their 401(k)s in 2025.
However, there's an exception for individuals who will be 60, 61, 62, or 63 in 2025. These individuals will have the opportunity to contribute even more.
Presenting enhanced catch-up contributions
The term "catch-up contribution" may be a misnomer when discussing a 401(k) as it implies one is behind on savings and needs to make up for time lost. Eligibility for catch-up contributions is not contingent on your account balance; it solely depends on your age. You could have a $7 million 401(k) at age 50 and still qualify for a catch-up contribution.
The truth is, many individuals begin their retirement savings late, and by the age of 50, they may not be where they should be. For those in this situation, catch-up contributions can serve as a lifeline.
In 2025, the catch-up contribution rules in 401(k)s will change favorably for individuals aged 60 to 63. These individuals will have an increased catch-up contribution limit of $11,250 in 2025.
It's important to note that this is not in addition to the standard $7,500 catch-up; rather, it replaces it. In other words, you cannot contribute an additional $7,500 plus $11,250. The total allowable 401(k) contribution for the year will be $34,750. However, if you reach the age of 60, 61, 62, or 63 during the 2025 calendar year, you can seize this opportunity and boost your funds for the senior years.
An option worth exploring
As of 2022, the median retirement plan balance among senior citizens aged 65 to 74 was $200,000, according to the Federal Reserve. Although this figure is better than having no savings, it may not constitute a substantial amount for a potentially lengthy retirement.
If your 401(k) balance is not as high as you would like it to be and you are eligible for the enhanced catch-up contribution, it may be beneficial to seek additional funds in 2025. The more money you can put into your 401(k), the more financial opportunities you will have at your disposal once retirement begins.
Additionally, contributions to a traditional 401(k) are made with pre-tax dollars. Thus, you will also benefit from shielding an even larger portion of your income from the IRS in 2025 by taking advantage of the enhanced catch-up contributions.
The enhanced catch-up contribution limit for individuals aged 60 to 63 in 401(k)s will increase to $11,250 in 2025, providing an opportunity to boost their retirement savings beyond the standard $7,500 catch-up. This combined limit of $34,750 can significantly contribute to their financial security in their senior years, especially if their current 401(k) balance is not as high as desired.