Significant changes to retirement savings rules are scheduled to take effect in 2025 and will primarily affect higher-income workers. These updates are part of the Secure Act 2.0, passed in 2022, designed to enhance retirement savings opportunities and make saving easier for “max savers.” These changes take effect next year, so here’s what prospective retirees need to understand now.
Increased recontributions for people nearing retirement
Workers nearing retirement will soon have the opportunity to significantly accelerate their savings. Starting in 2025, employees ages 60 to 63 will be able to make higher catch-up contributions to their 401(k) plans, with a new limit of $10,000 per year or the standard catch-up contribution limit. set to 150% of It’s bigger.
This increased catch-up contribution limit provides a valuable opportunity for workers to increase their retirement savings during their highest earning years. More than half of 401(k) participants with incomes over $150,000 and nearly 40% with account balances over $250,000 will make catch-up contributions in 2023, according to Vanguard’s 2024 “How America Saves” report. Ta.
New Roth requirements for high-income earners
However, there are important changes in how exactly these 401(k) catch-up contributions are made, especially for high-income employees. Additionally, starting in 2025, workers who earned more than $145,000 (adjusted annually for inflation) from a single employer in the previous year will be required to make pre-tax catch-up contributions. become unable to do so. These high earners must instead direct their catch-up contributions to a Roth account. Here’s how to know if it’s the right time to make a Roth IRA conversion.
Note: This requirement applies to catch-up contributions for 401(k), 403(b), and 457(b) plans.
What this means for taxes
With Trump-era tax cuts set to expire next year, the move to Roth catch-up contribution requirements for high-income earners represents a significant change in tax treatment. Donations are made on an after-tax basis and no immediate tax deduction is available. However, qualified withdrawals after retirement are tax-free.
Bottom line: Plan ahead.
With these changes on the horizon, workers should consider reviewing their current retirement savings strategies. If you’re a high-income earner nearing retirement, evaluate your eligibility for increased catch-up contributions and the tax implications of mandatory Roth contributions.
As always, consult your financial advisor to understand the long-term implications and consider alternative options. Remember, the most effective retirement strategy is to contribute consistently and allow your investments to grow unhindered over time.
