Upcoming 2025 Retirement Account Adjustment May Accelerate Retirement for Individuals in Their 60s
Upcoming 2025 Retirement Account Adjustment May Accelerate Retirement for Individuals in Their 60s
The typical American worker generally starts setting aside funds for retirement around age 28, based on a recent survey by Voya Financial. However, many wish they had started saving earlier. This is reasonable, as starting retirement savings earlier means less personal money contributes due to investment earnings' growth.
Numerous workers enter their 50s and 60s with insufficient retirement savings, and some fear their savings might run out before them. It's a legitimate concern, but a rule change coming into effect next year might offer some relief for workers in their 60s.
Enhanced catch-up contributions are on the horizon
Retirement savings plans like 401(k)s have allowed individuals older than 50 to contribute extra savings, known as 'catch-up contributions,' beyond the IRS-set annual limits for years. For example, in 2024, those under 50 can contribute up to $23,000, while those over 50, by December 31, can contribute up to $30,500. These limits will increase to $23,500 and $31,000, respectively, for 2025.
However, beginning next year, the catch-up contribution limit for adults aged 60, 61, 62, and 63 will surpass these limits. The catch-up contribution will be $11,250 next year, bringing their total 401(k) contribution capacity to $34,750. This catch-up contribution will undergo inflation indexing in future years.
SIMPLE retirement accounts, offered by some businesses with fewer than 100 employees, will also witness an increased catch-up contribution for adults aged 60 to 63 next year. They will be authorized to save an additional $5,250, beyond the regular contribution limit for all SIMPLE plan participants.
Who stands to gain?
Anyone reaching the ages of 60 to 63 by December 31, 2025, will be eligible to benefit from these higher catch-up contributions starting next year. You don't need to complete any extra steps to take advantage of them – just defer the necessary paycheck amounts as usual.
Of course, this assumes you have spare income to save, which isn't always the case. If you're behind on retirement savings due to financial constraints, you might need to adopt alternative strategies, such as:
- Claiming your 401(k) match if eligible
- Examining your budget and reducing unnecessary expenses
- Selecting the optimal time to claim Social Security to maximize your lifetime benefits
In the event that none of these methods work, you may need to consider postponing retirement. It's not ideal, but it provides more time to save while also reducing retirement's duration and associated costs. Your already-invested money will have the chance to grow further.
Lastly, take note of these new, enhanced catch-up contributions, even if you don't utilize them in 2025. If you receive a future pay raise, you might be able to set aside more in subsequent years. Just make sure to double-check the annual limits each year as they will continue to rise over time.
The enhancement in catch-up contribution limits for workers aged 60 to 63 could significantly impact their retirement finance, as they will be able to contribute an additional $11,250 to their 401(k) accounts in 2025. This increase in savings could help alleviate fears of retirement funds running out prematurely for some individuals.
With these enhanced catch-up contributions, retirees approaching their 60s might have an opportunity to boost their retirement savings, potentially extending their financial security during the retirement years.