Saving for retirement is one of the most significant endeavors that a person can undertake, therefore it is critical to understand which tactics would benefit them the most.
This is why, whenever the Internal Revenue Service (IRS) announces changes to how employees save money for the future, we recommend analyzing the prospect of using it and doing more.
The SECURE 2.0 Act, passed in 2022, ushered in a raft of new laws, which the IRS is gradually adopting to assist those who want to contribute more to their retirement.
There are new rules governing corporate retirement plans, including 401(k)s, but the most interesting one affects workers aged 60 to 63, who can now boost their contributions.
The new IRS rule on catch up contributions
Some may assume that is not news, after all, folks 50 and older have been able to save more money for retirement for years, known as a catch-up contribution (for 2024 and 2025, the amount is an additional $7,500 during the calendar year).
However, there is now an additional layer, known as a “super” catch-up payment, of up to $11,250 available to persons aged 60 to 63.
This implies that those with qualifying employer-sponsored plans can deposit an additional $3,750 into their 401(k). When combined with the usual contribution level, these workers will be able to save a total of $34,750 by 2025.
The expanded catch-up contribution limits are intended to help older Americans approaching retirement by allowing them to save more as they prepare to leave the job. Those who were unable to prioritize savings previously owing to poor incomes or conflicting financial demands, such as raising children, now have a wonderful opportunity to increase their retirement finances.
According to the Economic Policy Institute (EPI), more than one-third of workers aged 55 to 64 did not have access to an employer-sponsored retirement plan in 2019.
However, this improved saving option is only temporary. When you reach 64, the ceiling resets to the normal contribution cap, which is $31,000 in 2025.Challenges with Catch-up Contributions:
Will this be a helpful solution for most?
Regrettably, perhaps not. Because this is a larger sum of money to save, only those who can spare the income will be able and willing to do so, and those who would do so are likely to have already contributed the maximum amount to their retirement plan for years (this is not a bad policy for them, as everyone needs more retirement savings). The issue arises when we consider people who are unable to donate the original sum, let alone any further contributions.
According to the previously stated EPI data, 57.2% of employees nearing retirement contribute to a 401(k), leaving more than 40% of this population with no contribution, let alone a huge catch-up contribution.
And, with house payments, transportation bills, and other everyday expenses, many employees who contribute to employer-sponsored retirement plans cannot afford to increase their contributions.
Even though the new rule may not be the most effective in assisting all Americans in saving for retirement, it is still critical for all those who can to continue contributing the maximum amount possible to their retirement accounts, including these super catch-up contributions, in order to be as independent of Social Security as possible during retirement.
If you are unable to contribute significantly to your retirement, consider investing some money to help it grow and reducing your spending to allow you to save at least some money.
