Upcoming Modification to Big 401(k) in 2025 Potentially Amplifies Saving Investments. Identifying the Eligible Recipients.
Upcoming Modification to Big 401(k) in 2025 Potentially Amplifies Saving Investments. Identifying the Eligible Recipients.
One excellent method to prep for retirement is utilizing your company's 401(k). And it's about to get even better in 2025!
With New Year's Day approaching, several employees will have the chance to save more money using their 401(k). This means lesser taxes due in 2025 and continued tax-free compounding for years to come.
A significant change in the rules, as outlined in the SECURE 2.0 Act from 2022, will become effective on January 1st. The new rule upgrades the catch-up contribution limits for 401(k)s. Yet, this boost only affects specific investors.
Let's go over who may seize this chance and how much they can put towards their retirement funds in 2025.
The sensational catch-up contribution boost
The SECURE 2.0 Act revamps catch-up contributions for investors in 403(b), 457(b), and 401(k) plans. Catch-up contributions are applicable to individuals turning 50 years old or older within a given year. They're allowed to contribute a tad more over the standard contribution limits for these plans.
For 2025, the standard catch-up contribution limit for 401(k) plans hovers around $7,500. Thus, anyone fitting the age requirements can contribute a total of $31,000 to their workplace retirement plan.
The SECURE 2.0 Act amplified the catch-up contribution for certain employees to $10,000 or 150% of the standard catch-up contribution, whichever is more significant. Since 150% of $7,500 amounts to $11,250, that's the new catch-up contribution limit for select investors in 2025.
There's a twist in the tale. You're only eligible to make this super catch-up contribution in 2025 if you're aged between 60 and 63 (inclusive) by the end of the year. If you turn 64 in 2025, unfortunately, you've missed the boat. However, if you're about to celebrate your 60th birthday, you'll have four years to contribute a chunk of change to your 401(k).
Should you cash in on the larger catch-up contributions?
401(k)s might not be the most effective means of saving for retirement due to high fees and limitations on investment options. They often slide down the list of preference for many retirees once they qualify for their company match.
However, there's a strong argument in favor of utilizing the increased catch-up contributions for those eligible, especially in 2025.
Someone close to their 60s is likely earning more than they ever have before, even when considering inflation. Earning power regularly reaches its pinnacle around this age. Investing in a 401(k) allows them to defer taxes at their highest tax bracket in their highest-earning years. Paying high fees for a few years before retirement might be worthwhile in this scenario.
Moreover, certain individuals won't be able to benefit from the tax deferral on catch-up contributions starting in 2026. Another section of the SECURE 2.0 Act necessitates those with incomes surpassing a certain threshold to direct their catch-up contributions towards a Roth 401(k) account. The threshold is adjusted to $145,000 in 2023.
While a Roth account has its advantages, it might not be as enticing at higher income levels, particularly if the 401(k) has significant fees. If you can quickly move the funds into a Roth IRA with no fees, it becomes a more attractive option. Generally speaking, funds in a Roth account are more tax-efficient than funds in a taxable account for individuals over the age of 59 1/2 (the minimum age to withdraw earnings from a Roth account without taxes or penalties).
In conclusion, individuals in their early 60s with room to save a little extra for retirement should seriously consider capitalizing on the higher catch-up contribution limit in 2025. While catch-up contributions might not be as rewarding in the years that follow, they're still worth considering for many.
In light of the SECURE 2.0 Act, employees aged 60 to 63 in 2025 will have the opportunity to make larger catch-up contributions to their 401(k)s, up to $10,000 or 150% of the standard limit, to boost their retirement savings. This increase in contribution limit can be a strategic move for individuals in their highest-earning years, allowing them to defer taxes at their peak tax bracket.
The financial implications of utilizing this enhanced catch-up contribution limit could lead to significant savings during retirement, especially considering that individuals with income exceeding a certain threshold will only have the option to direct their catch-up contributions towards a Roth 401(k) account starting from 2026, which might not be as appealing due to potential high fees.