Retirement plan super catch-up coming in 2025

The prospect of financial insecurity in retirement is a harsh reality for many Americans.

The demise of traditional pension plans has shifted the burden of saving for retirement onto the shoulders of individual workers. Meanwhile, the Social Security trust fund is on a path to depletion and mandatory benefit reductions by 2033 absent major reform.

Congress has taken many steps over the past 50 years to incentivize individual retirement savings and investment, beginning with the introduction of the Individual Retirement Arrangement or IRA account in 1974. The most significant enhancements in two decades appeared with the 2019 Secure Act and its 2022 successor, Secure 2.0. The latest iteration includes a special “super catch-up” provision designed to allow workers to top up their retirement plan contributions during a limited four-year window from age 60 to age 63.

The IRS code limits the total amount that an employee can direct into 401(k), 403(b) or 457 defined contribution plans each year. The limit for 2025 is $23,500, up from $23,000 in 2024. Since 2001, contribution limits have been indexed to inflation and workers aged 50 or above were allowed to throw in a few extra bucks as a catch-up contribution, set at $7,500 for this year and next. Secure 2.0 went this option one better for older savers closing in on retirement.

Beginning in 2025, any worker who turns 60-63 during the calendar year will be allowed to toss in an additional $3,750 on top of the $7,500, or a super catch-up of $11,250. That means in practice that an employee aged 60 to 63 could defer a total of $34,750 per year. At 64 the catch-up falls back to $7,500.

The astute reader no doubt wonders why the Secure 2.0 Act bestowed the enhanced limit upon the apparently arbitrary age range of 60 to 63. Why not 64? The answer lies in the opaque machinations of budgetary legerdemain.

According to the bipartisan Congressional Joint Committee on Taxation, expanding the range would have reduced total tax revenue too much to stay within the limits of the budget rules agreed to by House negotiators. Inside baseball.

Like many features of company retirement plans, the option to make the super catch-up deferral is only available if the employer allows it in their plan, although retirement specialists expect most companies to adopt the policy.

The same deferral limits, catch-up deferral and the super catch-up apply to both traditional pre-tax deferrals as well as Roth 401(k) contributions. Beginning in 2026, high-income earners (defined as $145,000 or more) will be required to make all of their catchups into after-tax Roth accounts only.

Despite the more generous limits on retirement plan contributions and expanded catch-up amounts, it’s not clear how much impact the changes will have on the majority of the working population. For starters, not every American worker has access to a company defined contribution plan like a 401(k) or 403(b).

According to consulting firm PwC, one-third of U.S. private sector workers do not have a plan option at work. Among small businesses, less than half of employers provide a defined contribution plan. Another 16% of workers have a plan available to them but do not participate.

A separate study by the Federal Reserve Board found 56 million private sector workers aren’t offered a company plan, and fewer than 45% of all households have any type of retirement account. That means for roughly half of the workforce, the question of the deferral limit or any deferral at all for that matter is entirely academic.

It should also be apparent from the size of the contribution limits that most wage earners do not have sufficient resources to take full advantage of the available catchups. Vanguard’s annual review of the 1,500 retirement plans it manages finds that only 14% of participants take advantage of the maximum deferral available to them, but half of participants with incomes above $150,000 max out their annual savings.

Even beyond the $23,500 deferral limit, high-income workers have additional headroom to feed their 401(k) or 403(b) nest eggs over and above their elective deferrals with after-tax money that they may not appreciate. The total ceiling for all contributions including deferrals, employer matching, and after-tax contributions for 2025 is $70,000 even before considering the catch-up deposits.

To illustrate, suppose you earn $150,000 in 2025 and defer the maximum $23,500 into a pre-tax 401(k), and that your employer matches dollar for dollar up to 5% of income or an additional $7,500, for a total of $31,000. If your company plan allows after-tax contributions, you can still dump another $39,000 after taxes into the plan that will continue to grow tax deferred until you begin withdrawals in retirement. You will pay income tax on the earnings but can withdraw the principal contribution tax- and penalty-free at any time.

Add in the super catch-up at ages 60 to 63 and the total allowable plan contribution limit rises to $81,250. Obviously, this benefit is only relevant to the highest income earners and does little to address the broader retirement saving deficit across most of the income spectrum, but for those able to take advantage it’s a great opportunity to beef up their retirement cushion.

Next week, we will take a look at an array of policy options to address retirement security for lower income workers or those without access to an employer plan.

Christopher A. Hopkins, CFA, is a co-founder of Apogee Wealth Partners in Chattanooga.