Super Catch Up Contributions
Here are some key takeaways:
1. Super catch up contributions: Starting in 2025, individuals turning 60 can save an additional $11,250 per year over the normal limit in their workplace retirement accounts for ages 60-63.
2. Increased savings potential: This allows eligible individuals to save up to $34,750 per year in their workplace retirement accounts, potentially adding $139,000 over four years.
3. RMD age change: The Required Minimum Distribution (RMD) age is projected to be pushed back to 75 starting in 2026, allowing for more tax-deferred growth.
4. Balancing contributions: It’s important to right-size retirement contributions and not contribute the maximum amount just because it’s possible, especially if it compromises current financial stability.
5. Roth vs. pre-tax contributions: Consider the benefits of both Roth and pre-tax contributions for super catch up contributions, taking into account current and projected future tax brackets, as well as the need for flexibility in retirement.
Super Catch Up Contributions – Links
Catch all our Mullooly Asset videos here
Subscribe to the Mullooly Asset YouTube Channel
Watch this episode (Super Catch Up Contributions) on our YouTube Channel
Christine Benz article at Morningstar
Christine Benz’ newest book: “How To Retire” on Amazon
Super Catch Up Contributions – Transcript
If you’ve listened to any of our videos or listened to our podcasts, you’ve probably heard about catch up contributions, but you might not have heard of super catch up contributions. I thought you were going to say mustard contributions. “Ketchup?” Please.
It’s the Heinz 57 strategy. Bad jokes. Sorry. Come on, Tim.
Let’s move on.
So we’re going to be referencing an article from Christine Benz at Morningstar. Christine is great, we reference her stuff a lot. She’s got a new book out, so go check that out. She wrote about these super catch up contributions that are going into effect in 2025.
Just to recap, regular catch-up contributions: if you’re over 50 years old and you’re contributing to a workplace retirement plan like a 401(k), you can send an additional $7,500 in per year.
So that makes your total annual contribution up to $31,000. But now with the super catch up contributions, if you turn 60 in 2025, you’re now eligible to save $11,250 per year over the normal limit. So for years 60, 61, 62, and 63, you can now save $34,750 per year into your workplace retirement account.
So if you max out those four years before retirement, you’re adding $139,000 potentially that can grow tax-deferred until you hit RMDs. This is exciting. I think this is a big topic that we talk about a lot. You know, those pre-retirement years for the late fifties, early sixties. People are always looking for ways to catch up and make up for some lost ground there.
This is a great way for them to be able to pad their retirement accounts before they make the jump into retirement. Well, I happen to be right in this zone at 62, and so I’m looking forward to doing this in the sense that it’s been great to put $30,000 a year away into a 401(k) for the last couple of years, and now I can actually do a little more.
As you guys know, there were several years when the firm started where there were no contributions because there was no retirement plan. The plan was to keep the lights on. So I’m pretty happy to be able to do these super catch up contributions. Yeah, I think it’s a good thing. You know, it’s good to see the rules and the limits adapting over time. People are living longer and people are working longer.
So it’s good to see the rules adapting to those workers, those employees that are working longer into their sixties, giving them a little bit more of an incentive to help them kind of get across the goal line there to retirement in the last few years. You know, things like there are tons of plans and things that were put into place a long time ago. Like the initial idea with Social Security was that you get it at the full retirement age and then you die before you’re seventy. This be so.
But obviously, these things adapt over time. So it’s cool to see the 401(k) contributions, the super catch up contributions, benefiting people before they retire. Yeah, and along those lines, I think the way it stands right now, it’s subject to change, but RMD age is projected to get pushed back to 75. That’s starting in 2026. So that’s a couple more years of tax-deferred growth where you don’t have to take this money out of the account.
That’s always the catch, you know. When you hit RMD age, the tax-deferred benefit that you get from a 401(k), you do have to pay tax on it eventually. But like you said, people are living longer. The RMD age is projected to get pushed back to 75. One thing I do want to touch on here is that it’s great that you’re able to save extra money into your workplace plans, and if you’re able to do so, I think you should definitely consider doing that. But we don’t want to see folks stuff as much money into the 401(k) just because they can and not right-size those retirement contributions.
So I think, can we talk a little bit about rightsizing those contributions and not putting it in just because you can? Yeah, I feel like that goes for people that are considering the super catch up contributions, or even regular catch-up or, honestly, ANY sort of retirement contributions. It goes for people that are in their sixties, people that are just getting started in their twenties and thirties. I think prioritizing where you’re allocating your dollars is important.
If from a cash flow perspective, if you’re young or you’re old, if you know you need to worry about present you before you can worry about future you, it doesn’t mean you can completely disregard your 401(k) contributions completely, but trying to strike a balance of not running yourself into debt in the present to put money away for retirement in the future, I think it’s important to consider that balance. I agree. And you’ve heard me say to folks that I don’t even think it’s worth putting money into a workplace retirement plan until you’ve got three to six months of your expenses banked because life gets in the way. Things happen.
One of the saddest conversations that we have are people who call us and say, “I think I’m going to have to take a loan from my 401(k).” It’s because they didn’t map this out, and now they have some kind of financial pressure or emergency where they have to borrow money against themselves. But by the way, that loan needs to be paid back, so they’re not really fixing the problem.
One of the things that I usually suggest to folks when we’re having this conversation is you really ought to consider stopping your contributions for a year or two. I know I’ll get crucified by other financial planners for saying that, but we have to fix the cash flow. And, you know, if you’re putting money into an account that you can’t touch without some kind of penalties and taxes, what are you doing?
So you really need to get on track first, and then you can step on the gas and really put money away. Yeah, I think the timing of those loans is important as well. You know, if you’re in your mid-thirties or early forties, you’re taking a loan, you have some time to pay that back. You got a couple years. But if you’re a couple of years from retirement and needing to take a 401(k) loan, you don’t have much time to pay back.
So you’re kind of handcuffing yourself there. Obviously, it’d be great to not be in those situations to begin with. But I think if you do need to take a loan and you’re still working for at least another five years, it’s probably better than taking it two years out from retirement. Another thing I wanted to get your guys’ take on is the type of super catch up contributions that people should think about doing. You have your pre-tax contributions or you can do Roth contributions.
So just to outline the benefits of each: benefits of contributing to a Roth account is it gives you flexibility, especially if all of your other assets are in pre-tax retirement accounts. Roth accounts are not going to be taxed on the way out. So it’s going to put you in a lower income tax bracket during the early years of retirement if you draw that down first, which is important for things like Medicare premiums. Benefits of pre-tax is, you know, if you’re in your late fifties or early sixties in the super catch up contribution case, those are probably going to be your highest earning years.
So the more you contribute to a retirement account, the lower your tax is going to be for that year. So you really want to think about where you’re going to project to be from an income tax bracket in the early years of retirement versus just before retirement. There are benefits to each, drawbacks to each, not a one-size-fits-all answer, but what else should folks be considering?
Well, I’ll say that it wasn’t until SECURE 2.0, which was just passed this year, that they finally fixed the bug, so to speak, with Roth 401(k)s. It used to be that even though you had money in a Roth as part of your 401(k), you were subject to required minimum distributions from a Roth. I mean, that just made no sense at all. And so SECURE 2.0 has fixed that problem where now you won’t have required minimum distributions for the Roth portion of a 401(k) at work.
Can you believe that was still hanging out there until this year? Silly. Doesn’t seem right. But hey, we adjusted it and finally set it right. So yeah, that’s good. Yeah, I feel like you hit the nail on the head with all of the pros and cons of Roth versus pre-tax. For a lot of people, I think it’s just being aware that there are different options out there.
We see a lot of people coming to us that did a really good job of saving, and all of it, like 98% of their assets for retirement, are in pre-tax dollars, which isn’t a bad thing. But there could have been, if they were just a little more intentional or someone had kind of opened their eyes to the fact that maybe there was an option to save more in Roth dollars and after-tax dollars. Because asset allocation is important and saving is important, asset location is also pretty important.
And if you have the ability to be intentional about building up some buckets of banked assets, brokerage account assets, pre-tax dollars, post-tax dollars, it gives you a lot of flexibility in retirement to kind of piece together your income situation and reduce your taxes. Like you said, reduce things like Medicare premiums, and it kind of, you know, we say it in the office here, options give you options. So, just having the ability to have those different buckets gives you more options at your disposal.
And I think that’s a good thing. You got a full arsenal in retirement to tackle the beast of retirement and planning. Options give you options, but trading options do not give you options. Right. Yeah, we’re not talking about trading options there. Right. The bad joke in the beginning and then the office cliché. Come on. Just checking all the boxes here. I’m not on every video, so I’m trying to get all the highlights in. Getting your money’s worth. I love it.
So that is the recap of the super catch up contributions.
Go and check out Christine’s piece over at Morningstar.
And if you have questions, feel free to get in touch with us.
