How to Take Advantage of Catch-up Contributions

January 10, 2024
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When the SECURE 2.0 Act was enacted in 2022, it brought a lot of changes to affect financial planning strategies. One of the big additions allowed taxpayers to change their retirement plans by allowing for catch-up contributions starting in 2025.

New Catch-Up Contribution Limits

The act provides enhancement of catch-up contribution limits for individuals aged 60-63, starting in 2025. If you are in this specific age range, you will be able to contribute more to your retirement plan—beyond the standard annual contribution limits. This could be a great option for someone who has the ability to contribute more and wants/needs to put more funds into their tax-deferred retirement savings account.

Starting in 2025, the maximum catch-up contribution for employer-sponsored retirement plans (401(k), 403(b) and 457(b) specifically) will increase. The limit will be the greater of $10,000 (adjusted for inflation) or 150% of the standard 2024 catch-up contribution limit. Simple IRA participants will be allowed a limit of the greater of $5,000 or 150% of the 2025 standard catch-up limit.

It’s important to understand these new catch-up contribution enhancements only apply to individuals aged 60, 61, 62 or 63 during the year in question. Regular catch-up contributions still apply if you are aged 50 or older, or 64 and older. You can take advantage of catch-up contributions, but you will be limited to the current standards. As of 2024, the maximums are $7,500 for employer-sponsored retirement plans and $3,500 for Simple IRAs. Those amounts may be adjusted for inflation in future years.

Changes for High-Income Participants

Another change to catch-up contribution limits was originally set for 2024. However, it faced considerable backlash and has been postponed to 2026. It applied to high-income participants with prior-year FICA wages exceeding $145,000 (adjusted for inflation) in employer-sponsored retirement plans. They can only make catch-up contributions in a designated Roth IRA account. This won’t reduce taxable wages, but will still offer tax-free growth and withdrawals under qualifying conditions.

If enacted in 2026 as planned, this Roth account change will ultimately affect how high-income individuals can make catch-up contributions. Amendments to enable contributions may be required if your retirement plan doesn’t offer a Roth option.

Planning Ahead

As for standard catch-up contributions, the status quo remains for 2024 and 2025. However, it is important to understand the changing rules. Whether you are an individual turning 60-63 in 2025 or someone managing a 401(k) plan for your employees, you will want to plan accordingly and prepare for these changes.

To learn more about retirement plan management based on changing SECURE 2.0 rules and other important factors, contact Illumination Wealth today to schedule an introductory financial consultation.