How Some Americans Can Make a Supersize 401(k) Catch-Up Contribution
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What change to 401(k) catch-up rules is being announced for 2025?
The maximum amount that people are allowed to put in their 401k account per year rises when they turn 50. That increase is known as a catch-up contribution. Starting next year, the IRS will raise that amount even more for workers when they enter their 60s.
It was meant to help older workers who didn't save early or save enough during their careers. And that's often because they dip in and out of the workforce. But in effect, it also just helps super savers.
We'll talk to Wall Street Journal personal finance reporter Ashley Ebling after the break.
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The IRS is allowing some older Americans to make larger-than-usual contributions into their 401k accounts next year. Wall Street Journal personal finance reporter Ashleya Ebling joins me. Ashleya, why are these going up?
This is good news for retirement account holders. IRS announces inflation adjustments to these contribution limits every year based on formulas set in the law. And this year, the basic amount is going up and catch-up amounts are going up, plus a new special catch-up amount. So there are three pieces to the puzzle.
What are catch-up contributions?
The catch-up contributions, that's a dollar amount above the basic contribution limit that you can contribute to a retirement account starting the year you turn 50.
Which age group will be able to take advantage of the rule, allowing for a bigger contribution? Take us through the numbers as to what that would look like for 2025.
So there's a slightly bigger contribution for everybody, but the people who are 60 to 63-year-olds really get this new super boost, you could call it. So most workers will be able to put in the basic $23,500 into the 401k in 2025. That's up just $500 from this year. And then workers who are 50 to 59 or 64 plus can make the basic additional catch-up contribution of $7,500. That stayed the same this year and next. The big change is for people turning 60 to 63. That's the super catch-up. And they'll get to put in $11,250 more. in addition to the base $23,500. So that's like this crazy amount. It's $34,750 a super saver could put in their 401k. It's the biggest change to 401k contribution rules in two decades since catch-ups were first introduced.
Why is the IRS allowing this group in particular to do this?
So this new super catch up for the 60 to 63 year olds, that's a law change that was part of the big 2022 retirement law. And when Congress put it in, they just made it effective 2025 because they needed to give time for the plan administrators to do all the record keeping and backend computer work to make sure that people were putting the right amount in. It was meant to help older workers who didn't save early or save enough during their careers. And that's often because they dip in and out of the workforce. But in effect, it also just helps super savers.
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