Jamie Spencer
Significant changes to retirement savings rules are set to take effect in 2025, targeting high-income workers and boosting options for those looking to maximize their retirement contributions. These updates, introduced under the Secure Act 2.0 passed in 2022, are designed to help “max savers” make the most of their peak earning years. Here’s a breakdown of what hopeful retirees need to understand before these changes take effect.
Higher Catch-Up Contribution Limits for Workers Near Retirement
Starting in 2025, employees aged 60 to 63 will have new opportunities to accelerate their savings. Catch-up contributions to 401(k) plans will be increased to either $10,000 annually or 150% of the standard catch-up contribution limit, whichever is greater. This means that workers nearing retirement age can make larger, tax-advantaged contributions during a critical period in their savings journey.
For many high-income earners, these changes represent a chance to maximize their retirement savings at the peak of their earning potential. Vanguard’s 2024 How America Saves report shows that more than half of 401(k) participants earning over $150,000 and nearly 40% with account balances above $250,000 took advantage of catch-up contributions in 2023. The expanded limits may encourage even more workers to prioritize retirement savings.
New Roth Requirements for High Earners
With the new catch-up contribution opportunities come some important adjustments for high earners. Starting in 2025, workers who earned more than $145,000 in the previous year (a threshold adjusted annually for inflation) from a single employer will be required to make catch-up contributions to a Roth account. This requirement, covering 401(k), 403(b), and 457(b) plans, means these contributions will be made with after-tax dollars, allowing for tax-free withdrawals in retirement.
This Roth requirement adds a new layer to retirement planning for high-income earners. For those who haven’t yet made Roth contributions, this shift may be a good time to consider converting existing retirement assets to a Roth IRA, particularly if future tax rates are a concern.
Tax Implications with Expiring Trump-Era Tax Cuts
This shift toward Roth contributions coincides with the anticipated expiration of Trump-era tax cuts. Without the option of pre-tax catch-up contributions, high earners won’t benefit from an immediate tax deduction on these contributions. However, this adjustment offers tax-free withdrawals in retirement, potentially offsetting the initial tax hit.
Planning Ahead for a Smooth Transition
With the changes to retirement savings rules on the horizon, it’s a smart time to review your current retirement strategy. High earners in particular should consider the new catch-up limits and assess the tax implications of the Roth requirement. Consulting with a financial advisor can help you understand these long-term impacts and evaluate alternative retirement planning options. Remember, consistently contributing to your retirement accounts and allowing your investments to grow uninterrupted remains one of the most effective strategies for a secure retirement.
