In 2025, there will be a significant change to 401(k) catch-up contributions

Many Americans struggle with a lack of retirement savings. However, it may become easier for some older workers to put away more money in 2025.

The Secure Act 2.0, passed by Congress in 2022, made several improvements to the retirement system, including updates to 401(k) plans, required withdrawals, 529 college savings plans, and more.

While some Secure 2.0 changes have already been made, another major change for “max savers” will begin in 2025, according to Dave Stinnett, head of strategic retirement advisory at Vanguard.

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About four in 10 American workers are behind on retirement planning and savings, according to a CNBC survey of about 6,700 adults in early August.

But changes to 401(k) catch-up contributions — a higher limit for workers age 50 and older — could soon help certain savers, experts say. Here’s what you should know.

Employees can now defer up to $23,000 into 401(k) plans for 2024, with an additional $7,500 for workers age 50 and older.

But starting in 2025, workers ages 60 to 63 will be able to increase their annual 401(k) catch-up contributions to $10,000 — or 150% of the catch-up limit — whichever is greater. The IRS has not yet announced the catch-up contribution limit for 2025.

“This can be a great way for people to boost their retirement savings,” said certified financial planner Jamie Bosse, senior advisor at CGN Advisors in Manhattan, Kansas.

An estimated 15% of eligible workers made catch-up contributions in 2023, according to Vanguard’s 2024 “How America Saves” report.

Those making catch-up contributions tend to be higher earners, Vanguard’s Stinnett explained. But they may still have “real concerns about being able to retire comfortably.”

More than half of 401(k) participants with income over $150,000 and nearly 40% with account balances over $250,000 made catch-up contributions in 2023, the Vanguard report found.

Another change to Secure 2.0 removes the upfront tax break for catch-up contributions for higher earners by only allowing after-tax contributions to Roth accounts.

The change applies to catch-up contributions to 401(k), 403(b) or 457(b) plans that earned more than $145,000 at a single company in the previous year. The amount is adjusted annually for inflation.

However, in August 2023, the IRS postponed implementation of this rule until January 2026. This means that employees can still make pre-tax catch-up 401(k) contributions through 2025, regardless of income.