Extra Catch-Up for 2025

Extra Catch-Up Contributions for 2025

Posted On October 5, 2024 By Scott Stratton, CFP(R), CFA In Retirement Planning /   No Comments

There are extra catch-up contributions for 2025 which will allow some investors to save even more. The SECURE Act 2.0 allows savers age 60 to 63 to contribute a higher catch-up amount to their 401(k), 403(b), or SIMPLE IRA plans. These amounts are 50% more than the regular catch-up contributions for savers age 50+. Along with this good news, I’m afraid there is also some bad news which will impact many of my readers. Congress giveth and Congress taketh away. Here are the details.

What Age?

First, an important definition for retirement plans. When we talk about your age for 2025, that is the age you are at the end of the year, on December 31, 2025. You could be 59 for most of the year, but as long as you turn 60 before the end of the year, you treat the whole year as if you are 60. There are no partial years or pro-rated benefits. You may be 49 most of the year, but as long as you are 50 on December 31, you are 50 for the whole year.

Contribution Limits for 2025

401(k) and 403(b)

  • Under age 50: $24,000
  • Age 50+: plus a $7,500 catch-up = $31,500
  • Age 60-63 only: a $11,250 catch-up = $35,250

SIMPLE IRAs

  • Under 50: $16,500
  • Age 50+: plus a catch-up of $3,500 = $20,000
  • Age 60-63 only: a $5,250 catch-up = $21,750

Please note that the larger catch-up will apply only from age 60 to 63. The year when you turn 64, the catch-up amount drops back down to the regular age 50 catch-up amount.

Read More: What Percentage Should You Save?

New Limits on High Earners

There’s a new problem for high-earners, which will take effect the following year. Starting January 1, 2026, if you make over $145,000, you can make catch-up contributions only into a Roth 401(k). Those catch-up contributions will be after-tax, not tax-deductible. This will be based on your prior year (2025) wages. Your employer will have to determine if you are eligible to make traditional catch-up contributions, or if you will only be allowed to make Roth catch-up contributions. Either way, you can still make the normal contribution (presently $24,000) into your traditional 401(k). This limitation will only impact the catch-up contributions.

Read More: To Roth or Not to Roth?

We are still waiting on advice from the IRS on how these new limits will be handled. For example, how do we treat someone who changes jobs? How will an employer know an employee’s earnings before they started with your company? What about for self-employed persons? 401(k) providers are scrambling to create processes to comply with the new rules.

I’m disappointed that instead of trying to get Billionaires to pay their fair share, Congress decided that a professional making $150,000 a year to support their family doesn’t deserve to deduct their catch-up contributions. This is essentially a new tax on upper-middle class Americans. For employees over 50 who are currently maxing out your 401(k), this is essentially increasing your taxable income by $7,500 in 2026.

I suspect that a lot of employees will choose to not make the Roth catch-up contributions and will simply cap their contributions to the standard $24,000 amount. Without the tax savings, some won’t be able to afford the full contribution. And that’s too bad, because Congress is now discouraging people from saving for retirement.

What should you do? Write your Congressperson and share your thoughts. And then do the Roth catch-up contribution anyways, if you can. While you will probably be in a lower tax bracket in retirement than during your working years, there is still a benefit to having those dollars growing tax-free in a Roth. And let’s hope they reverse this horrible new rule and go back to letting everyone deduct their catch-up contributions.

One Step Forward, Two Steps Backwards

You got all excited to learn about the extra catch-up contributions for 2025. It’s a small amount for only four years of your life, but thank you, Washington, for thinking of us. And the following year, they take away the ability to deduct the catch-up contribution for everyone over 50 who makes above $145,000. If you planned to work to 65 or 70, you just lost 15 to 20 years of tax-deductible catch-up contributions.

This hurts because in your working years, you might be paying 24%, 32%, 35% or more in Income taxes. You want those 401(k) deductions in your prime earning years. Once you are retired, you will be in a lower tax bracket, maybe 12% or 22%. Starting in 2026, they’re making you pay taxes on your catch-up contributions and paying the higher taxes today.

Saving is your responsibility. Most of us don’t work for an employer who provides a generous pension plan. We face a looming Social Security crisis in less than a decade now. I haven’t met too many people who felt they had over-saved for retirement. But I have met a lot who are concerned that they are behind or not on-track for a comfortable retirement. And that is what we do here at Good Life Wealth Management everyday – think, plan, and deliver on your retirement goals.

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To Roth or Not to Roth?

Posted On August 29, 2016 By Scott Stratton, CFP(R), CFA In Retirement Planning /  

The question of “Roth or Traditional” has become even more complicated today with the advent of the Roth 401(k). Which should you choose for your 401(k)? Like many financial questions, the answer is “it depends”.

In asking the same question for an IRA, investors often look at their eligibility for the Roth versus their ability to deduct the Traditional IRA contribution. For the 401(k), that’s not an issue – there are no income restrictions or eligibility rules for a Traditional 401(k) or a Roth 401(k). You should also know that while you may choose Roth or Traditional contributions, any company match will always go in the Traditional bucket.

How to choose, then? Here are five considerations to making the decision:

1) If you are going to be in a lower tax bracket in retirement, it’s preferable to defer taxes today and pay taxes later. If this describes your situation, then you are likely better off in the Traditional 401(k). A majority of people should have an expectation of lower taxes in retirement.

2) The problem is that we don’t know what future tax rates will be. We do know that we are running massive budget deficits and that the accumulated national debt is a growing problem. While every politician wants to promise lower taxes to get votes, that seems unrealistic as a long-term solution to our budget issues. Retirees are often surprised that their taxes do not in fact vanish in retirement. Pension, Social Security, RMDs, etc. are all taxable income.

Link: Taxes and Retirement

If you believe you will be in the same or higher tax bracket in Retirement, then the advantage goes to the Roth. While you will not realize a tax benefit today from a Roth contribution, your money will grow tax-free. If you are going to pay the same tax rates in the future as today, you would be indifferent, in theory. Except that…

3) When you reach retirement, a $1 million Roth gives you $1 million to spend, whereas $1 million in a Traditional IRA or 401(k) may be worth only $750,000, $600,000, or less after you take out Federal and State income taxes. This means saving $18,000 in a Roth 401(k) is worth more than the same $18,000 in a Traditional 401(k), because the Roth money will be available tax-free.

If you are in a lower tax bracket or can comfortably pay the taxes, then the Roth may be preferable. In retirement, if you have both Roth and Traditional accounts, you can choose where to take withdrawals to best manage your taxes. (We call this tax diversification.)

4) The only caveat to the Roth contribution is that contributing to a Traditional 401(k) can lower your Adjusted Gross Income (AGI). If having a lower AGI would make you eligible for a tax credit, or eligible for an IRA contribution, then it may be beneficial to choose the deductible contribution.

For example: The Saver’s Tax Credit

5) There are no Required Minimum Distributions from a Roth account. If you are in the fortunate position to have plenty of retirement assets, making Roth contributions will add to tax-free assets, rather than creating an RMD liability for when you turn 70 1/2.

Last thought: for the past two decades, I have met people who don’t want to invest in a Roth because they think the government will take away the tax-free benefit in the future. I don’t see this happening. The government actually prefers Roths because it increases current tax revenue rather than the Traditional, which decreases current taxes. And I don’t see Roth accounts being used or abused by Billionaires or corporations – the amounts are so small and used mainly by working families.

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