WSJ Your Money Briefing - How Some Americans Can Make a Supersize 401(k) Catch-Up Contribution

Episode Date: November 7, 2024

Starting next year, the IRS will boost 401(k) catch-up contribution levels substantially for people in their early 60s. Wall Street Journal personal finance reporter Ashlea Ebeling goes through the numbers with host J.R. Whalen. Sign up for the WSJ's free Markets A.M. newsletter.  Learn more about your ad choices. Visit megaphone.fm/adchoices

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And now on to the show. Here's Your Money Briefing for Thursday, November 7th. I'm JR Whalen for The Wall Street Journal. The maximum amount that people are allowed to put in their 401k account per year rises when they turn 50. That increase is known as a catch-up contribution. Starting next year, the IRS will raise that amount even more for workers when they enter their 60s. It was meant to help older workers who didn't save early or save enough during their careers.

And that's often because they dip in and out of the workforce. But in effect, it also just helps super savers. We'll talk to Wall Street Journal of Personal Finance reporter, Ashley Ebling, after the break. The IRS is allowing some older Americans to make larger-than-usual contributions into their 401k accounts next year. Wall Street Journal personal finance reporter Ashley Ebeling joins me. Ashley, why are these going up?

This is good news for retirement account holders. IRS announces inflation adjustments to these contribution limits every year based on formulas set in the law. And this year, the basic amount is going up and catch-up amounts are going up, plus a new special catch-up amount. So there are three pieces to the puzzle. What are catch-up contributions? The catch-up contributions,

that's a dollar amount above the basic contribution limit that you can contribute to a retirement account starting the year you turn 50. Which age group will be able to take advantage of the rule allowing for a bigger contribution? Take us through the numbers as to what that would look like for 2025. So there's a slightly bigger contribution for everybody but the people who are 60 to 63 year olds really get this new super boost you could call it. So most workers will be able to put in the basic $23,500 into the 401k in 2025.

That's up to $500 from this year. And then workers who are 50 to 59 or 64 plus can make the basic additional catch up contribution of $7,500. That stayed the same this year next. The big change is for people turning 60 to 63. That's the super catch up and they'll get to put in $11,250 in addition to the base $23,500. So that's like this crazy amount.

It's $34,750 a super saver could put in their 401k. It's the biggest change to 401k contribution rules in two decades since catch-ups were first introduced. Why is the IRS allowing this group in particular to do this? So this new super catch-up for the 60 to 63 year olds, that's a law change that was part of the big 2022 retirement law. And when Congress put it in, they just made it effective 2025 because they needed to give time for the plant administrators to do all the record keeping and backend computer work to make sure that people were putting the right amount in. It was meant to help older workers who didn't save early or save enough during their careers

And that's often because they dip in and out of the workforce But in effect it also just helps super savers So if anybody 50 or older right up through retirement age wants to make any level of catch-up Contribution to their retirement account. How do they do that? You'll probably get an email the year you turn 50 from your 401k administrator. That would be like Fidelity or Vanguard. And they'll say, oh, you're 50, you're eligible for catch ups. Do you want to change your contribution amounts?

And then you go online to the portal and change the percentage that you're saving. So in some plans, it's a percentage and in some plans, it's a dollar amount. The plan administrators will cap it to make sure that you don't go over the limits. What if somebody doesn't have a 401k through their job? How can they make the contributions? So that's a sore point for people who don't have 401ks. They're generally limited to IRAs and Roth IRAs for retirement savings and those have much lower limits, much lower contribution limits. Those are also subject to inflation adjustments, but they didn't go up this year

because of the way the inflation adjustments work. So for an IRA or Roth IRA, it's still the $7,000 annual basic limit and $1,000 limit for catch-ups. How do the rules differ for traditional versus Roth accounts? So there are different tax implications, whether you choose traditional versus Roth.

And the limits are the same, but the traditional pre-tax contributions reduce your taxable income. You pay taxes when you eventually take the money out of the account. And then by comparison with a Roth account, you're paying the taxes up front, and the money grows and can be withdrawn tax-free. For somebody in their early 60s

who wants to take advantage of this and put the maximum catch up in their account, what kind of math goes into that? So it takes a lot to hit the max. In a lot of cases, it's two earner couples where people are able to do this. Say a 60-year-old earns $150,000, they would have to save 23% of their salary to

max out the basic limit and the new super catch up. AC That's a big chunk of their income. KS It is, but it still can make sense if you have the wherewithal to do it. Sometimes it would be a two earner couple or just a one earner couple where they're making it work. I talked to one man who's in his late 50s and he said they've stretched to make sure they're putting the maximum in as it is now and they're gonna try to do so when he reaches 60

with the ideas this is the money that you're gonna live on in retirement. That's WSJ reporter, Ashley Ebling. And that's it for your money briefing. We'll be back tomorrow with WSJ's Ray Smith to discuss the right way to reach out to an old boss to advance your career. This episode was produced by Ariana Asparu with supervising producer Melanie Roy. I'm JR Whalen for The Wall Street Journal.

Thanks for watching!