Enhanced Catch-Up Contributions for Retirement Plans in 2025
Starting in 2025, individuals aged 60 to 63 will have the opportunity to make higher catch-up contributions to their company retirement plans, including 401(k)s, 403(b)s, and 457 plans. This is an expansion of the existing catch-up contribution option for those over 50, which currently allows an additional $7,500.
New Contribution Limits for 2025:
- **Under age 50:** $23,500
- **Ages 50-59 and over 64:** $31,000
- **Ages 60-63:** $34,750
These enhanced contributions, often referred to as "super catch-up" contributions, will be indexed to inflation in future years. To qualify, your retirement plan must allow for catch-up contributions and offer the super catch-up option. If your plan doesn’t currently support this, consider discussing it with your plan administrator.
### Eligibility and Timing
You don’t need to wait until your 60th birthday to start making these extra contributions. As long as you turn 60 by the end of 2025, you can make the higher contributions throughout the year.
### Roth vs. Traditional Contributions
Retirement savers still have the choice between making traditional pretax contributions or Roth contributions. A provision in Secure 2.0 initially required higher-income savers (earning $145,000 or more) to make all catch-up contributions to Roth accounts starting in 2024. However, this requirement has been delayed until 2026, giving savers more flexibility for now.
#### Benefits of Roth Contributions:
1. **Tax Diversification:** Many savers have most of their retirement funds in pretax accounts, making Roth contributions an attractive option for tax-free withdrawals.
2. **Current Tax Rates:** With tax rates potentially rising in the future, paying taxes now at current rates can be advantageous.
3. **RMD Considerations:** Required minimum distributions (RMDs) limit the tax-free compounding of pretax contributions, making Roth contributions more appealing.
#### Benefits of Traditional Contributions:
1. **Immediate Tax Break:** Higher-income earners in their peak earning years may benefit more from the immediate tax break of pretax contributions.
2. **Extended RMD Age:** Secure 2.0 will increase the RMD age to 75 by 2033, allowing more time for tax-deferred compounding.
A financial advisor can help determine the best strategy based on your current and future tax situation. You can also use online calculators to aid in decision-making or split contributions between traditional and Roth accounts.
### Additional Retirement Savings Options
If you’ve maxed out your company retirement plan contributions or your plan doesn’t offer super catch-up contributions, consider these additional options:
1. **IRA:** In 2025, individuals over 50 can contribute $8,000 to IRAs, provided they have enough earned income. The choice between traditional and Roth IRAs depends on whether you prefer to pay taxes now or later. Income limits apply, but the backdoor Roth maneuver can be used to circumvent these.
2. **Aftertax 401(k):** Available mainly in large 401(k) plans, these contributions can be converted to Roth 401(k)s if the plan offers automatic in-plan conversions.
3. **Health Savings Account (HSA):** While not a retirement account, an HSA can serve as a supplementary retirement savings vehicle for those with qualifying high-deductible healthcare plans. By using non-HSA assets for healthcare expenses, you can invest the HSA in long-term securities, making withdrawals tax-free up to the amount of previously incurred healthcare expenses.
4. **Taxable Brokerage Account:** Although these accounts don’t offer tax breaks, investing in equity index funds, ETFs, or municipal bonds can limit tax drag. There are no contribution limits or withdrawal restrictions for taxable brokerage accounts.
By exploring these options, you can maximize your retirement savings and ensure a more secure financial future.