One of the most important things a worker can do is start saving for retirement. To do this, they need to know which strategies will work best for them.
This is why we recommend that whenever the Internal Revenue Service (IRS) changes how workers save money for the future, they look at it to see if they can use it and do more.
The SECURE 2.0 Act, which was passed in 2022, brought about a lot of new rules that the IRS is slowly putting into place to help people who want to put more money into their retirement do so.
New rules have been put in place for employer retirement plans, such as 401(k)s. The most interesting change affects workers between the ages of 60 and 63, who can now increase the amount they contribute.
The new IRS rule on catch up contributions
Some people might not think that’s news, since people aged 50 and up have been able to save more for retirement for years. This is known as a “catch up contribution,” and for 2024 and 2025, it’s an extra $7,500 per year.
There is now an extra layer, though. It’s called a “super” catch-up contribution, and it gives people aged 60 to 63 up to $11,250. An extra $3,750 can be put into 401(k)s of people whose employers offer qualifying plans after this. Plus the normal amount that they put in, these workers will be able to save a total of $34,750 by 2025.
The higher catch-up contribution limits are meant to help older Americans who are getting close to retirement by letting them save more before they retire.
This is a great chance for people who couldn’t start saving earlier because they didn’t make enough money or had other financial obligations, like raising children.
The need for these kinds of steps is big because, as of 2019, more than one-third of workers aged 55 to 64 did not have access to an employer-sponsored retirement plan, according to the Economic Policy Institute (EPI).
The better way to save, though, is only available for a short time. When you turn 64, the limit goes back to the normal amount you can contribute, which in 2025 is $31,000.What’s hard about making catch-up contributions
Will this be a helpful solution for most?
Sadly, it’s possible not. Since this is a bigger sum of money to save, only people who can spare the extra money will be willing and able to do so.
Those who would do so have probably been putting the maximum amount into their retirement plan for years, which is fine because everyone needs to save more for retirement. The problem comes up when we think about people who can’t even give the original amount, let alone more.
According to the EPI report we already talked about, 57.2% of workers who are getting close to retirement contribute to a 401(k). That means that more than 40% of this group of workers don’t make any contributions at all, let alone a super catch-up contribution.
And many people who do put money into employer-sponsored retirement accounts can’t spare any more money to increase their contributions because they already have to pay their mortgage, their car payments, and other daily costs.
While the new rule might not help all Americans save the most for retirement, it is still important for those who can to keep putting in as much as they can to their retirement accounts, including these extra “catch up” contributions, so that they don’t have to rely on Social Security too much when they retire.
Invest some money to help it grow if you can’t put away a lot of money for retirement. Also, try cutting back on your spending so that you can save at least some money.
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