Starting in 2025, the U.S. government is introducing a “super catch-up” rule for 401(k) plans aimed at helping those nearing retirement boost their savings. Here’s a breakdown of this significant change:
What is it?
The super catch-up rule, part of the SECURE Act 2.0, allows individuals aged 60 to 63 to contribute even more to their 401(k)s above the standard catch-up limit. This means those in their peak earning years can maximize their retirement savings as they approach retirement.
Key Features
Higher Contribution Limit: Starting in 2025, the super catch-up contribution will be greater than $10,000 or 150% of the standard catch-up limit, adjusted for inflation.
Roth Accounts for High Earners: If you earn over $145,000 (adjusted for inflation), all catch-up contributions, including the super catch-up, must be made to a Roth account. You’ll pay taxes upfront, but retirement withdrawal will be tax-free.
Benefits
Maximize Savings: The higher contribution limit helps bridge savings gaps and prepare for a longer retirement.
Tax-Free Growth: While high earners pay taxes now, Roth accounts offer tax-free growth, potentially reducing your tax burden in retirement.
Financial Flexibility: The increased limit provides more flexibility to prioritize retirement savings alongside other financial goals.
Challenges
Upfront Taxes: The Roth requirement for high earners may increase your taxable income in the short term.
Plan Compatibility: Ensure your employer’s plan supports Roth contributions and the new super catch-up provision.
Staying Informed: Contribution limits are subject to inflation adjustments, so stay updated on the latest figures.
What to Do
Review your 401(k) plan: Confirm it allows Roth contributions and accommodates the super catch-up rule.
Plan your contributions: Start strategizing how to maximize your contributions as you approach age 60.
Seek professional advice: A financial advisor can help you navigate the tax implications and optimize your retirement strategy.
The super catch-up rule is a valuable tool for securing a comfortable retirement. You can take full advantage of this opportunity by understanding the rules and planning accordingly.
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