President Joe Biden signed into law several provisions intended to boost Americans' financial readiness for retirement last week.
The Secure 2.0 Act of 2022 – a follow-up to the 2019 Secure Act – contains several fundamental changes to existing retirement account rules and certain related tax breaks. Among those provisions is the increase in "catch-up" contributions for people nearing retirement.
Beginning in 2025, individuals who are 60 to 63 years old will be able to put a larger sum of their income into their retirement plans, including 401(k), 403(b) plans, SIMPLE IRA and SIMPLE 401(k).
The Secure 2.0 Act will allow these savers to make catch-up contributions of up to $10,000 annually or 50% more than the regular catch-up contribution amount in 2025 to their workplace plan in 2025. People who are 50 or older with wages over $145,000 during the previous year will be required to make catch-up contributions to a Roth account in after-tax dollars, according to Fidelity.
In addition, retirement plan catch-up contributions for those over 50 has increased to $7,500 in 2023, up from $6,500 in 2022.
IRA catch-up contributions from people who are 50 and older will be indexed for inflation starting in 2024. Meanwhile, the $10,000 catch-up contribution limit for people between 60 and 63 will be indexed for inflation beginning in 2026.
"Housing costs, student debt, childcare costs and everything else that costs more than it used to puts a strain on the budget," Herman Thompson, Jr., CFP, a financial planner at Innovative Financial Group, said. "This is why the enhanced catch-up provision is so important.
"Most workers will earn more, owe less and have fewer dependents in their 50s than they had in their early 30s," Thompson continued. "This chance to save on taxes – when income is highest and deductions are fewer – while making up for lost time is critical for most."
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Americans fall behind on retirement savings, report says
Rising costs have drained Americans' savings, significantly impacting how much they'll have to retire with, according to Fidelity Investments' Q3 2022 Retirement Analysis. The average 401(k) and IRA balances shrunk by 23% and 25% respectively, year over year.
The average balance for savers was $141,542, according to Vanguard’s 2022 analysis of retirement accounts. The average balance for savers aged 55 to 65 was roughly $280,000, the analysis showed. This is far short of the amount needed to maintain a comfortable standard of living during retirement, according to one financial advisor.
"One of the main challenges facing Americans when it comes to saving for retirement is that they often do not save enough," Matt Wilson, president and chief investment officer at Keen Wealth Advisors, said. "While it is difficult to predict exactly how much the cost of living will increase in the future, the extra allotment for catch-up contributions provided by the Secure Act 2.0 can certainly help Americans better prepare for their retirement years.
"By saving more for retirement, individuals can potentially have a larger pool of funds to draw from in order to cover the costs of living during their golden years," Wilson continued.
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Here's how savers can maximize increased catch-up contribution limits
Inflation and rising costs have made it more difficult for many Americans to build up their retirement savings, according to a survey by Anytime Estimate.
Among those saving for retirement, 52% said they began to do so before their 30s. However, 23% of "boomers" said they waited until they were 50 or older to start saving for retirement.
"Generally speaking, what helps money grow is time," Bob Chitrathorn, CFO and vice president of Simplified Wealth Management and a certified plan fiduciary advisor, said. "If you are low on retirement dollars prior to retirement, well it probably means that you will need to be using whatever funds you save in the not-so-distant future."
Those who are having difficulty saving for retirement can take these three steps to take advantage of the increased catch-up contribution limits provided by the Secure 2.0 Act:
Contribute to your employer-sponsored retirement plan
Savers over 50 can now contribute an extra $7,500 per year to their 401(k) accounts in addition to the regular contribution limits.
"If you are unable to contribute the maximum amount, try to contribute as much as you can afford," Wilson said. "Every little bit helps."
Utilize employer-matching contributions
Check if your employer offers matching contributions to 401(k) accounts. If they do, try to contribute at least enough to take full advantage of this benefit.
Explore other retirement savings options
People can look beyond 401(k)s and consider other opportunities for saving for retirement. Options include traditional individual retirement accounts (IRAs) and Roth IRAs. People can also consider saving money after tax in a brokerage account.
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