Catching Up: Tax Perks for Older Folks

I have an affection for clean and clever stand-up comedy, I mean folks like Jim Gaffigan, Nate Bargatze, and most recently, Sheng Wang, a Houston native and absolute riot. How unfortunate to be watching his Netflix special with my teenager, who observed that Mr. Wang “looks young, but is probably, like, 40.” I advised him to stop talking immediately.

Advancing age has certain benefits. I don’t care how many friends I have; just how much I like them. I don’t care what I look like at the grocery store (be warned if you live near Cypress), and I’m more confident and self-aware than I have ever been.

In ten years, I’ll be able to take advantage of certain financial benefits, too. Most employer-sponsored retirement plans include a provision to allow catch-up contributions to participants aged 50 and older. For 2023, that was $7,500 over the normal contribution limit of $22,500. It’s a great perk of being a quinquagenarian if you can afford to do it.

Some of this is going to change soon. With the passage of the SECURE 2.0 Act in late 2022, Congress approved a number of updates including one slated for 2025 that will enhance catch-up contribution limits for individuals aged 60 to 63.

Starting in 2025, the maximum catch-up contribution for employer-sponsored plans—401(k), 403(b), and 457(b)—increases to the greater of $10,000 (adjusted for inflation) or 150 percent of the 2024 regular catch-up contribution limit. For SIMPLE IRA participants, this limit is the greater of $5,000 or 150 percent of the 2025 regular catch-up limit.

To be clear, these super catch-up contributions are allowed only if you reach age 60, 61, 62, or 63 during the year in question. If you are not within that age window for the year in question but are age 50 or older, the “regular” catch-up contribution maximums apply.

2026 will see a change pertaining to high-income participants (those with prior-year FICA wages over $145,000, adjusted for inflation) in employer-sponsored plans. Such individuals will make catch-up contributions only to a designated Roth account. While these contributions don’t reduce taxable wages, they do offer tax-free growth and withdrawals under qualifying conditions.

Since older savers have less time to let compounding work its magic before retirement, catch-up contributions offer a significant opportunity to bolster your retirement savings, especially if you haven’t saved regularly in the past.

Yet, this 2022 Vanguard survey shows that though approximately 98% of employers offer catch-up provisions, only around 15% of employees take advantage. There are valid reasons why someone may decline to participate, like needing the cash to cover regular living expenses.

If that’s not the case for you, then be ready at 50 (or at ages 60-63 in 2025) to squeeze all you can from your employer plan. Your future self with thank you.