Catch-up contributions to retirement plans

The IRS recently changed retirement savings plans, like 401(k) plans offered by many employers, for workers nearing retirement. Previously, workers 50 and over could make catch-up contributions. Starting in 2025, employees between 60 and 63 can increase these catch-up contributions by an additional 14%, according to this WSJ article. In this post, we discuss why many workers may want to take advantage of this new rule.

401(k) plan contributions

Employee contributions to 401(k) plans were originally established to encourage growing a nest egg for retirement. By contributing pre-tax income, workers could also reduce their current-year taxable income. For older workers who were unable to save earlier in their careers, these catch-up contributions can help retirees meet their savings goals. Also, as many workers enter their 50s, their income often peaks. So, the deferred taxes on 401(k) contributions may provide an added benefit if income is lower in retirement.

Pre-tax or after-tax contributions to a 401(k)

Workers may also have an option in their retirement plan to contribute to a Roth 401(k) plan using after-tax contributions. While these contributions don’t provide the immediate tax deferral of the traditional 401(k) contribution, they do provide tax-free retirement income. Roth 401(k) contributions also help workers save after-tax dollars and avoid the income limit for direct contributions to a Roth IRA. To make a full Roth IRA contribution in 2024, single filers modified adjusted gross income (MAGI) must be under $146,000, and joint filers under $230,000. Alternatively, some workers and retirees may consider a Roth conversion. For large emergency expenses that may occur during retirement, such as medical-related expenses, retirees can use after-tax retirement savings in Roth accounts to avoid higher tax brackets.

Not sure what to do next with your catch-up contributions?

We offer a free simulator to see if you can reach your retirement savings goal.

You can use this tool to see how pre-tax or after-tax contributions may affect your future retirement savings. We hope you find this tool educational!