Yes, Retirement Catch-Up Contributions Get Bigger But Watch Out For These Tax Changes

The benefits of aging include senior discounts, wisdom gained from experience and – when it comes to retirement saving – catch-up contributions. Anyone 50 and older have the option to contribute extra cash to a wide variety of retirement accounts. And that includes your 401(k) or IRA plans. We’ll go over who can gain contributions and what changes were made after the Secure 2.0 Act passed.

For help figuring out the best retirement strategy for your needs, talk to a financial advisor.

Catch-Up Contributions in 2023

For 2023, those 50 years old and older can contribute an extra $1,000 to their individual retirement account (IRA). That’s on top of the annual contribution for 2023 IRAs increasing to $6,500.

Those with a 401(k), 403(b), most 457 plans or the federal government’s Thrift Savings Plan will see an annual contribution of $22,500. And if you are ages 50 and up, you can contribute an extra $7,500 to your retirement accounts.

Secure 2.0 Act Adjustments For Catch-Up Contributions

Now, thanks to the recently passed Secure Act 2.0, the catch-up amount will start adjusting for inflation starting in 2024, but only in $100 increments (meaning any adjustment of less than $100 will leave the cap at $1,000.)

If you’re even older, you can stash even more extra cash in your workplace plans. Starting in 2025, workers between 60 and 63 can add catch-up contributions of $10,000 or 150% of the limit for 2024, whichever is more. The $10,000 limit will start adjusting for inflation in 2026.

High-Income Earners Can’t Make Pre-Tax Contributions

But what Secure 2.0 Act gives, it also takes away. This is the case at least in workplace plans for higher-income workers.

Until now, all catch-up contributions received the same tax treatment as the investor’s account. If the person’s IRA or 401(k) was tax-deferred so was any catch-up amount. But starting in 2024, workers who earned $145,000 or more from their employer in the previous year will be required to make all of their catch-up contributions to Roth accounts.

That means those contributions will lose their pre-tax status that allowed contributions to compound tax-free until withdrawn. Analysts say the Roth requirement helps the IRS collect at least some retirement account revenue right away. This is said to be instead of in small increments as you take withdrawals during retirement.

Roth Catch-Up Doesn’t Apply to SIMPLE IRAs and SIMPLE 401(k)s 

The Roth catch-up requirement doesn’t apply to SIMPLE IRAs or SIMPLE 401(k) accounts. The catch-up limit for 2023 on those accounts is $3,500.

And just as with 401(k)s, SIMPLE plan participants between age 60 and age 63 get catch-up limits of $5,000 or 150% of the catch-up amount for other workers, whichever is greater, starting in 2025. The $5,000 limit also will adjust for inflation each year.

The requirement to maintain Roth accounts for some catch-up contributions will most likely add some extra paperwork and monitoring your retirement accounts, maintaining both pre-tax and after-tax accounts gives investors flexibility when calculating retirement withdrawals. The option to make retirement withdrawals from either taxable or nontaxable accounts allows investors to adjust their income for tax purposes.

Bottom Line

Getting older has financial benefits, especially if you are 50 and up saving in a retirement account. But with the Secure 2.0 Act passing, not all income earners will see the same benefits. Those earning at least $145,000 from their employer in the previous year will be required to make all of their catch-up contributions to Roth accounts. But high-income earners making at least $145,000 and having a SIMPLE IRA or SIMPLE 401(k) account will not be affected by those changes.

Tips for Getting Retirement Ready

• Industry experts say that people who work with a financial advisor are twice as likely to meet their retirement goals. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

• If you want to set up and plan your retirement goals, use SmartAsset’s retirement calculator. It can help you figure out how much you will need to save to retire comfortably.

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