Larger Retirement Savings for Senior Employees

The beginning of a new year encourages change. Some decide to improve their eating habits while others resolve to include more exercise in their daily routine. Even though resolutions typically don't last long, people often make goals to cut back on spending and save more. Though the IRS isn't cheering you on to eat more veggies, they are offering some help with your savings goal. 

A noteworthy feature of the Secure 2.0 Act is the increased "special catch-up" contribution for 401(k) plans beginning 2025. There are many advantages to this provision, especially for those who are nearing retirement. 

Increased Limits  

Individuals between ages 60-63 are eligible to make additional contributions to their 401(k) plans under the special catch-up provision. This is in addition to the existing catch-up contribution limits for those 50 and older. In 2025, eligible participants may make catch up contributions of $11,250 versus the standard $7,500 for people 50 and older. By raising the limit, employees in their highest earning years can significantly boost their retirement savings, making up for gaps they may have experienced earlier in their employment. 

The higher catch-up will be available for SIMPLE IRA participants turning 60-63 too, though the limit is $5,250 versus $3,500 for those 50 and older. SIMPLE plans are not required to offer the 50 and over catchups, so if your plan doesn’t, then the special catchup won’t be available either. 

Higher Earnings 

For many people, their earning potential peaks in their early 60s. Together with the special catch-up provision, this extra disposable income enables employees to contribute more to tax-advantaged retirement plans in their last years of employment. Those who might not have been able to make larger contributions in earlier years because of financial limitations like college loans, childrearing, or other obligations will particularly benefit from this. 

Tax Benefits 

The tax-deferred nature of contributions to 401(k) plans lowers taxable income in the year of the contribution. The special catch-up provision enhances this benefit by permitting larger contributions, which can reduce the current tax burden while building savings tax-deferred. For high-income earners, this can result in substantial tax savings during their most lucrative years. 

Close the Gap 

Many Americans are underprepared for retirement, with savings often falling short of recommended levels. The enhanced catch-up provision gives individuals an opportunity to close this gap. For those who started saving later in life, or experienced interruptions in their retirement planning, this measure provides a pathway to strengthen financial security before retirement. 

Free Money 

Contributing more to a 401(k) plan increases the likelihood of receiving maximum employer matching contributions. By encouraging employees to fully utilize employer-matching retirement incentives, this extra benefit enhances the value of the special catch-up provision.  

For older workers, the Secure 2.0 special catch-up provision for 401(k) plans in 2025 presents a great opportunity to increase their retirement savings. By taking advantage of tax savings, maximizing contributions, and addressing savings gaps, this initiative enhances financial readiness and ensures a more secure retirement.