As you get closer to your chosen retirement date, it’s not uncommon to feel a sense of unease. Sure, you’ve been saving and planning, but how can you be certain that you’ve done enough?

Adjusting your budget to reduce spending in retirement might be an option but could prove challenging at this stage of your life. Likewise, extending your retirement date could prolong your income stream but may be more complicated to manage as your wind down your working years and plan for what’s next. So, what else can you do?

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Catch-up Contributions: Benefits to Boost Your Retirement Savings

Fortunately, the IRS acknowledges that retirees-to-be face this conflicting dilemma, and offers some help. Starting at age 50, you are allowed to make “catch-up” contributions to your retirement accounts. These contributions can be the key to helping you put more money away as you navigate the home stretch into retirement.

But what are catch-up contributions, and how can you best leverage them in your retirement plan?

Catch-up Contribution Amounts and Limits: How It Works

Each year, the IRS sets a maximum amount that you're allowed to contribute into qualified retirement accounts each year.

In 2024, savers are allowed to contribute up to $23,000 to a 401(k), 403(b), or most 457 accounts. This limit represents the total, in aggregate, of what you're allowed to contribute throughout the year. Importantly, $23,000 is the employee-directed maximum. Employer contributions (matches, profit-sharing contributions, etc.) do not count toward this total.

However, those 50 and older aren’t subject to the same limits. IRS provisions make saving for retirement more manageable in the later years with catch-up contributions. For 2024, individuals age 50 and older can make additional catch-up contributions of up to $7,500. Therefore, maxing out both your base 401(k) contribution and available catch-up contribution allows you to save $30,500 annually.

Contact a Wealth Enhancement advisor about your retirement catch-up contributions today.

IRA Catch-up Contribution Limits

Catch-up contributions also apply to IRAs. In 2024, you can contribute an extra $1,000 on top of the $7,000 annual limit on regular contributions. So, those 50 and older can contribute a total of $8,000 to a Traditional IRA in 2024.

To conclude, if you're 50 or older and have both a 401(k) and a Traditional IRA, you can contribute $8,500 more to your retirement accounts using catch-up contributions than someone younger than 50. Talk about something that improves with age!

The below table shows contribution limits for the year 2024:

Figure 1. 2024 Plan and Catch-Up Contribution Limits

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*Available to those only 55 and older

Source: Internal Revenue Service

Upcoming Changes to Catch-up Contributions in 2025 and 2026 (SECURE 2.0 Act)

The employer-sponsored retirement plan landscape is undergoing a significant shift with respect to catch-up contributions. There are two major changes coming: one in 2025, and one in 2026.

2025 Catch-up Contribution Change: Higher 401(k) Contributions

In 2025, individuals aged 60, 61, 62, and 63 (by the end of the year) may realize a catch-up contribution opportunity. If you fall within this age range, starting January 1st, 2025, you may be able to make catch-up contributions up to the amount of $10,000, or 150% the regular catch-up contribution limit, whichever is greater.

For example, let’s say the “standard” age 50+ catch-up contribution for 401(k)s in 2025 is $8,000. Because 150% of $8,000 is $12,000, and that is greater than $10,000, you would be able to make a catch-up contribution of up to $12,000 if you were between age 60 and 63.

2026 Catch-up Contribution Change: The Roth Requirement

In 2026, legislation included in SECURE Act 2.0 will require that individuals with wages exceeding $145,000 in the preceding year (indexed to inflation) must make any catch-up contributions to a Roth-type plan, such as a Roth 401(k).

This change not only impacts individual employees by forcing them to save their catch-up contributions with after-tax dollars and thus, reducing their tax deduction, it also mandates that employers offer a Roth plan if they intend to continue allowing catch-up contributions.

This initial provision was originally mandated to become active on January 1, 2024, but given the lack of time for payroll providers, administrators and recordkeepers, employers and employees to adequately prepare, the IRS announced a delay. The legislation will now take effect on January 1, 2026.

If you have questions about how this shifting retirement legislation could impact your retirement, contact your financial advisor.

Benefits of Catch-up Contributions

Maximizing catch-up contributions can come with income tax savings for those who save in tax-deferred retirement accounts. A $30,500 contribution to your 401(k) counts as a deduction to your income. At the 24% income tax bracket, that equates to a $7,320 federal tax savings.

These deductions can be particularly beneficial for employees later in their working careers as oftentimes these individuals tend to be in their peak earnings years, with higher marginal tax rates.

Roth contributions and Roth catch-ups (which will become mandatory for some in 2026) are another option. While they don’t provide the same tax deduction that pre-tax contributions do, they allow tax-free withdrawals and less onerous distribution requirements in your retirement years.

Thinking about how the tax treatment of your contributions fits into your short-, mid-, and long-term plan is an important step. Everyone’s situation is different, but taking advantage of the increased contribution limits is an easy way to ensure you’re maximizing your retirement savings potential. This, along with a carefully constructed financial plan, can help make sure you’re still on the path to the retirement of your dreams.

This information is not intended to substitute for specific individualized tax advice. We suggest you discuss your specific tax issues with a qualified tax advisor.

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