Look Alive, Preretirees: An Additional Savings Option Is Coming in 2025
Starting in 2025, individuals aged 60-63 will gain access to increased retirement plan catch-up contributions, offering new opportunities for savings, with key changes to Roth contribution rules delayed until 2026.
People over 50 have long had the ability to make additional “catch-up” contributions to their 401(k)s, as well as 403(b)s and 457 plans. But starting next year, savers in company retirement plans who are between the ages of 60 and 63 may be able to contribute an even higher amount.
The standard catch-up contribution for people who are over age 50 is $7,500. But thanks to the 2022 retirement legislation called Secure 2.0, people who are 60, 61, 62, or 63 in 2025 will be able to contribute an additional $11,250 to their plans next year (in total, not on top of the $7,500), provided their plans allow for catch-up contributions and also offer the “super catch-up.” (If your plan doesn’t allow for such contributions yet, be sure to ask your plan administrator if there are any plans to do so.) And you won’t have to wait until your 60th birthday to make the extra contributions: As long as you’ll be 60 by the end of 2025, you’re eligible to make the extra contributions throughout the year.
Thus, the allowable contribution amounts for 2025 are as follows:
Under age 50: $23,500
50-59 and over 64: $31,000
60-63: $34,750
Future catch-up contribution amounts will be indexed to the inflation rate.
Roth Versus Traditional? You Still Have a Choice
One fork in the road for retirement savers is whether to make traditional pretax contributions or Roth. A provision in Secure 2.0 would require higher-income retirement savers (those earning $145,000 or more) to make all catch-up contributions into their Roth accounts; catch-up contributions into traditional tax-deferred accounts would not be allowed. That provision was set to go into effect in 2024, but in 2023, the Internal Revenue Service announced that it would be delaying that requirement until 2026. Thus, retirement savers who are over age 50 still have the option to designate their catch-up contributions as pretax or Roth.
At first blush, Roth catch-up contributions seem more attractive than pretax for a few key reasons. One is the tax-diversification argument: Many retirement savers, especially those in the baby boom generation and Generation X, hold the bulk of their retirement savings in pretax accounts, so the option to build retirement savings that can be withdrawn tax-free via Roth accounts looks appealing. Another is the “taxes are low today but” argument: While tax rates look likely to stay the same or go even lower under President-elect Trump and a Republican Congress, they may well head higher in the future. That makes paying taxes at today’s rates—as Roth contributors do—look like a good deal. Finally, the required minimum distributions, or RMDs, which currently apply to people who are age 73 and above, limit the amount of tax-free compounding that older savers can earn on their new pretax contributions before the money has to come out again.
On the other hand, people who are able to fully fund their company retirement plans, inclusive of catch-up contributions, are apt to be higher-income earners in their peak earnings years. If they haven’t yet amassed substantial retirement savings, taking the tax break today by making a pretax contribution may be a smart move and may also help them qualify for additional tax credits and deductions. It’s also worth noting that Secure 2.0 will push out the RMD age even further: The RMD age is currently 73 and is set to go to 75 in 2033. This means today’s 60-year-olds will have another 15 years to benefit from tax-deferred compounding before they’ll have to take their first RMDs.
A financial advisor can help put a finer point on the decision about whether to make Roth or traditional contributions, considering your household’s complete tax picture both now and in the future, and online calculators can also help illuminate the decision-making. And as always, it’s an option to split contributions between traditional and Roth accounts if you’re on the fence.
Additional Ideas for Those Playing Catch-Up
If you’re funding your company retirement plan to the max (or your plan doesn’t allow for super catch-up contributions) and are still seeking additional retirement savings options, here are some of the key ones to consider.
IRA: In 2025, people over 50 can contribute $8,000 to IRAs, so long as they have enough earned income to cover the contribution amount. The same general calculus applies to choosing pretax/traditional contributions or Roth as applies to company retirement plan contributions: Are you better off paying taxes now or later? If the answer is now, go Roth; if you expect to be in a lower tax bracket later, traditional contributions may be the better bet. Income limits apply to traditional deductible and Roth contributions, but you can circumvent them via the backdoor Roth maneuver.
Aftertax 401(k): These contributions, which are usually only available for participants in large 401(k) plans, can be a fabulous option for high-income supersavers, especially if the plan offers automatic in-plan conversions to Roth 401(k)s.
Health savings account: The HSA, available to people who are covered by a qualifying high-deductible healthcare plan, isn’t technically a retirement account, but it can be a decent ancillary retirement savings vehicle for people who can afford to use it that way. By using non-HSA assets to pay for healthcare expenditures, you can invest the HSA in long-term securities. Assuming you have receipts to substantiate the previous healthcare expenses you paid out of pocket, HSA withdrawals are tax-free up to the amount of previously incurred healthcare outlays.
Taxable brokerage account: You won’t earn a tax break on the way in or out, as you will with pretax and Roth contributions, respectively. Nor will you benefit from tax-sheltered compounding. But you can generally limit the tax drag on taxable accounts if you invest in equity index funds or exchange-traded funds or municipal bonds. Better yet, there are no contribution limits or withdrawal strictures for taxable brokerage accounts.