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Good News: Americans Can Soon Make $10,000 Retirement Catch-Up Contributions


IRS guidelines for retirement catch-up contributions are currently established for people ages 50 and older. This allows individuals within this age category to make 401(k) contributions of up to $7,500 starting in 2023 (a slight bump from the $6,500 you were allowed starting in 2020). Savers who team up with a financial advisor may already be familiar with this benefit and be taking advantage of the reduced taxable income it offers.

However, thanks to the SECURE 2.0 Act passed in December, this rate will be seeing a significant jump for some Americans — to $10,000, as a response to a list of crippling setbacks Americans have faced amid the COVID-19 pandemic. But as with many effects deemed “too good to be true,” there is a catch to the government’s seeming generosity. Here are the details including eligibility, maximums and start time.

The SECURE 2.0 Act and Catch-up Contributions

Section 109 of the new SECURE 2.0 Act has a great deal of opportunities for the American public to see savings and tax breaks in the coming years, but catch-up contributions are doubly beneficial.

Taking advantage of catch-up contributions allows you to first, reduce your taxable income and second, apply additional funds to a working vehicle that boosts retirement savings.

The Timeline Breakdown of Boosted Catch-Up Contributions

The timeline for these increases won’t come all at once; instead, it will be broken out for the next few years. These amounts are also indexed annually (meaning they can be increased to account for inflation). In turn, the rates that are set for 2022-2023 could see an increase that makes 2024 slightly higher, but for now, we have to assume it will remain at the $7,500 mark.

  • 2022: $6,500
  • 2023: $7,500
  • 2024: $7,500
  • 2025: $10,000

The “Catch” on Catch-Up Contributions

In true government fashion, there are a few stipulations to this increase that will limit participation.

  1. You must be at least 50 years old to contribute $7,500 over the standard limit set for 401(k)s. (Total of $30,000 annually starting in 2023)
  2. You must be at least 60 years old to contribute $10,000 over the standard limit set for 401(k)s.
  3. You cannot be over 63 years old. Once you reach 63 you’re catch-up limit returns to $7,500.
  4. The additional $10,000 does not apply until 2025. So if you’re hitting 64 in 2025, you missed the boat.
  5. All catch-up contributions are on an after-tax basis.
  6. If you earn $145,000 or less, then catch-up contributions are allowed on a pre-tax basis.

Measuring The Difference Catch-Up Contributions Can Make

Struggling to see the benefit of catch-up contributions? Here’s an example of the notable difference your retirement savings could see.

First Scenario: A 50 year old commits to the standard contribution max of $22,500 annually, or $1,875/month, into her company sponsored 401(k). With an average annual compounding effect of 8%, she retires at age 67 with $1,018,381.

*Note: This Calculation includes: An initial investment prior to 50 of $70,000. A maxed standard annual contribution of $22,500/12 months. A maxed catch-up annual contribution of $7,500/12 months compounded annually at 8%.

Second Scenario: The same 50 year old commits to the standard retirement contribution of $1,875/month ($22,500 annual) in addition to $625/month ($7,500 annual) in catch up contributions. With an average annual compounding effect of 8%, she retires at age 67 with $1,271,508.

*Note: This Calculation includes all of the above plus: An assumption that the max catch-up contribution will remain $7,500 annually over 17 years

The Outcome: In the second scenario, the worker accumulated $253,127 more in retirement savings over the last 17 years of employment than in the first scenario. Additionally, the second scenario was also able to lower the worker’s taxable income by about $14,000 each year resulting in further savings.


The Bottom Line

Thanks to the SECURE 2.0 Act, catch-up contributions for Americans are set to rise to $10,000 by 2025. That boost over the now standard $7,500 catch-up contribution amount will only be available to Americans who are 60 and are not older than 63. The benefit of catch-up contributions cannot be understated. The results speak for themselves and with these increasing being indexed to match inflation, we can predict they will continue to rise. By taking advantage you can reap more in savings both now and in the future.

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