In 2025, older workers in America may find it easier to set aside more money for retirement, thanks to the Secure Act 2.0. Enacted by Congress in 2022, this legislation brought about several improvements to the retirement system, including updates to 401(k) plans, required withdrawals, 529 college savings plans, and more. While some changes have already taken effect, a key change for “max savers” is set to begin in 2025. Dave Stinnett, Vanguard’s head of strategic retirement consulting, anticipates that this change will help certain savers boost their retirement savings. According to a CNBC survey, 4 in 10 American workers are behind in retirement planning and savings, highlighting the importance of these updates.
One of the changes that could assist certain savers is the increase in 401(k) catch-up contributions. Currently, employees can defer up to $23,000 into 401(k) plans for 2024, with an additional $7,500 allowed for workers aged 50 and older. Starting in 2025, workers aged 60 to 63 will be able to boost their annual catch-up contributions to $10,000, or 150% of the catch-up limit, whichever is greater. This change could be beneficial for those who are looking to increase their retirement savings and ensure a comfortable retirement. While only an estimated 15% of eligible workers made catch-up contributions in 2023, this change could encourage more individuals to take advantage of this option.
It is noted that individuals making catch-up contributions tend to be higher earners, with more than half of 401(k) participants earning over $150,000 and nearly 40% with account balances over $250,000 making catch-up contributions in 2023. Despite their higher incomes and savings, they still have concerns about retiring comfortably, underscoring the need for additional ways to save for retirement. The higher limit on catch-up contributions starting in 2025 could provide these individuals with a valuable opportunity to increase their retirement savings and address these concerns.
Another significant change brought about by Secure Act 2.0 is the switch of catch-up contributions to after-tax Roth accounts for higher earners. This change removes the upfront tax break on catch-up contributions for those who earned more than $145,000 from a single company the prior year. While the IRS initially planned to implement this rule in 2025, they recently announced a delay until January 2026. This means that workers will still be able to make pretax 401(k) catch-up contributions through 2025, regardless of their income. This delay provides workers with more time to take advantage of the existing tax benefits for catch-up contributions.
Overall, the changes introduced by Secure Act 2.0 aim to address the retirement savings shortfall faced by many Americans. By increasing the limits on 401(k) catch-up contributions and transitioning them to after-tax Roth accounts for higher earners, these updates seek to provide individuals with more options to save for retirement. With a significant portion of American workers behind in retirement planning and savings, these changes could make a meaningful impact on their financial security in retirement. As these updates take effect in 2025, individuals are encouraged to take advantage of these opportunities to boost their retirement savings and work towards a more comfortable retirement.
