Washington — If you're nearing retirement, you may soon have more money stashed away in your nest egg, if you can afford it.
The Internal Revenue Service announced that the maximum amount an individual can contribute to a 401(k) or similar plan will increase to $23,500 in 2025 from $23,000 in 2024.
The federal government already allows people over 50 to make additional contributions, allowing them to save more as they approach retirement age. This is known as a “catch-up” contribution.
The standard catch-up contribution amount will remain the same in 2025, up to a maximum of $7,500, according to the IRS.
But starting next year, workers aged 60 to 63 will be able to make “super” catch-up contributions of up to $11,250 (plus $3,750) a year.
That means they could potentially contribute up to a total of $34,750 annually to a workplace retirement account.
The significantly higher catch-up contributions are part of SECURE 2.0, which President Joe Biden signed into law in 2022 as part of his $1.7 trillion omnibus spending package.
“Anything that encourages more investment is generally a good thing, but this rule change probably won't have a huge impact,” Ted Rothman, senior industry analyst at Bankrate, told ABC News. “Between the ages of 60 and 63, you're maxing out your account, and there should be a very small number of people who are now able to progress to that level.”
According to , only 14% of retirement plan participants maxed out their 401(k) limits in 2023. vanguard research.
Even if you've always made the most of your retirement savings contributions, you may need to reallocate your funds as you get older and start facing additional expenses, such as sending a child to college or caring for an aging parent. It may happen.
The annual contribution limit for individual retirement accounts, excluding 401(k) plans and similar employee assistance plans, will remain the same next year at $7,000, but additional contributions for those age 50 and older will remain at $1,000. .
These limits apply to both traditional IRAs, which provide a tax deduction based on your income, and Roth IRAs, which have no tax deduction but provide tax-free growth and withdrawals in retirement.
An aging population and fewer companies offering pensions means a smaller portion of the overall population is ready for retirement.
The typical household headed by a person between the ages of 55 and 64 has just $10,000 saved in a retirement account, according to an analysis of federal data. Economic Policy Research Institute Schwartz Center for Economic Policy Analysis.
“There's nothing stopping you from investing at any age, but there's a reason Einstein said compound interest is the eighth wonder of the world,” Rothman said. “Investing is more powerful when you're young.”
Still, catch-up contributions can be a valuable way to increase your retirement savings and enjoy tax benefits.
Rothman said it's also important to contribute regularly to your 401(k) and increase your contributions over time. He suggested putting a reminder in your calendar to increase your 401(k) contributions each year.
“The idea is that by doing it in stages or in tandem with salary increases, you're less likely to miss out on additional money,” Rothman said.
For example, he said, if you're contributing 5% of your salary now, can you increase that to 6% or 7% next year?
“If you gradually increase the percentage, you're more likely to continue with that approach, and your standard of living won't decline either,” Rothman added.
The video in the player above is from a previous report.
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