By Ashlea Ebeling

Older workers can put more money than ever in their 401(k)s starting next year under a new law meant to boost retirement savings for people in their early 60s.

The maximum amount savers can put in retirement accounts is adjusted each year for inflation, along with the extra catch-up contributions available to anyone 50 and up.

Starting next year, workers between 60 and 63 can make a super catch-up contribution of up to $11,250, the IRS said Friday. People who turn those ages sometime during the year will be able to put up to $34,750 into their workplace retirement plans. That is about 14% more than in 2024 and marks the biggest change to 401(k) contribution rules in two decades.

Catch-ups are meant to help older workers who didn't save early or save enough during their careers, often because they dipped in and out of the workforce. Even big savers take advantage of the catch-up.

In Vanguard's workplace retirement saving plans during 2023, 14% of participants saved the maximum, including catch-ups. Roughly half of participants with income over $150,000 contributed the maximum. And one in six older than 65 did so.

"I'll keep doing the maximum catch-up contributions I can do now, and if there's a higher number when I'm 60, I'll do that as well if we can afford it," said Jeff Sturman, a 54-year-old bank examiner in Winston-Salem, N.C.

The IRS makes annual inflation adjustments to the maximum amounts people can put in their retirement accounts based on formulas in the tax law. Inflation adjustments have also lifted tax brackets and estate and gift-tax thresholds.

How much you can contribute in 2025

 
               401$(K)$ CONTRIBUTION LIMITS WITH CATCH-UPS 
Age at Year-End                    2024     2025     $ Change  % Change 
Under 50                           $23,000  $23,500  $500      2.2% 
50-59                              $30,500  $31,000  $500      1.6% 
60-63                              $30,500  $34,750  $4,250    14% 
64 and Over                        $30,500  $31,000  $500      1.6% 
Source: Internal Revenue Service 
 

Most workers will be allowed to put up to $23,500 into their 401(k)s and similar workplace retirement plans in 2025, up $500 from this year. Workers 50 to 59, or 64 and older, can make an additional catch-up contribution of up to $7,500, the same as last year.

The change for those turning 60 to 63 is called the super catch-up. Congress added it as part of a 2022 retirement law, but made it effective starting in 2025.

For workers of all ages at companies that allow special after-tax contributions, there is an even bigger total $70,000 contribution limit for 2025, up from $69,000 this year. That limit includes the basic $23,500, employer contributions, and any additional after-tax contributions. Combined with the new catch-up provision, those in their early 60s can get up to $81,250 in these plans.

The importance of catch-ups

Nearly all employers offer catch-ups. Most will want to offer the super catch-up, too, said Kari Jakobe, an employee benefits leader at Milliman.

That said, it takes a lot to hit the max. A 60-year-old who earns $150,000 would have to save 23% of her or his salary to max out the basic limit and new super catch-up amount.

Michael Alania, a 53-year-old advertising technology executive in Fair Lawn, N.J., is contributing the maximum $23,000 this year, split 75% pretax and 25% Roth, and has contributed the full catch-up since turning 50.

"I started saving what I was able to afford that would leave me with what I needed for the month," said Alania. "When you get to retirement age, that's going to be your income."

Some people will retire before becoming eligible for the super catch-up. You can take money out of a 401(k) from a former employer at age 59 1/2 without penalty.

Pretax versus Roth savings

The limits are the same if you choose pretax or Roth savings. Pretax contributions reduce your taxable income, and you pay taxes when you eventually take the money out of the account.

With Roth accounts, you pay the taxes upfront, and the money grows and can be withdrawn tax-free.

The retirement law that created the super catch-up added another wrinkle: Catch-up contributions will have to be Roth for those who made more than $145,000 the previous year. That rule was supposed to go into effect in 2024, but the IRS has delayed it until 2026.

Unlike the 401(k) adjustments, the contribution limit for individual retirement accounts and Roth IRAs will remain the same in 2025 at $7,000, with a $1,000 catch-up for those 50 and older.

Write to Ashlea Ebeling at ashlea.ebeling@wsj.com

(END) Dow Jones Newswires

November 01, 2024 12:02 ET (16:02 GMT)

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