Utilizing your employer’s 401(k) plan is one of the most effective ways to prepare for retirement. Starting in 2025, this option is set to improve even more.

As the new year approaches, certain employees will have the chance to increase their 401(k) contributions. This adjustment could lead to extra tax advantages in 2025 and enhance tax-free growth for the years ahead.

A new rule from the SECURE 2.0 Act, effective January 1, introduces raised catch-up contribution limits for 401(k) plans. However, this applies only to a specific group of investors.

Let’s explore who stands to gain from this and how much they can contribute to their retirement plans in 2025.

Introducing the enhanced catch-up contribution

The SECURE 2.0 Act updates the rules regarding catch-up contributions for workers participating in 403(b), 457(b), and 401(k) plans. Catch-up contributions are available for anyone aged 50 or older during the year.

For the year 2025, the standard limit for catch-up contributions to 401(k) plans is set at $7,500. Therefore, those who qualify by age can contribute a total of $31,000 to their retirement accounts at work.

The SECURE 2.0 Act raises the catch-up contribution limit for qualifying employees to either $10,000 or 150% of the standard amount—whichever is greater. Since 150% of $7,500 equals $11,250, this will be the new maximum for eligible investors in 2025.

Here’s an important detail: to qualify for this increased catch-up contribution in 2025, you must be aged between 60 and 63 (inclusive) at the year’s end. If you turn 64 during 2025, unfortunately, you won’t qualify. However, if you are about to turn 60, you’ll have four years to benefit from these larger contributions to your 401(k).

Is it wise to utilize the increased catch-up contributions?

While 401(k) plans can be a useful retirement tool, they are often burdened with high fees and investment restrictions, causing many savers to prioritize other options after securing their company match.

Nonetheless, individuals qualifying for larger catch-up contributions should consider fully taking advantage of these if possible, especially since 2025 is an excellent time to do so.

As one reaches their early 60s, they often find themselves in a high-earning phase of their career, even when adjusting for inflation. It’s common for earning potential to hit a peak during this time. Contributing to a 401(k) enables tax deferral at your highest marginal tax rate, which can justify paying the associated fees in these years leading up to retirement.

It’s crucial to note that starting in 2026, some individuals may not benefit from the tax deferral on catch-up contributions. A provision in the SECURE 2.0 Act requires those earning above a certain limit to direct their catch-up contributions into a Roth 401(k). This income threshold is indexed to $145,000 for 2023.

While a Roth account has benefits, it may not be as appealing at higher income levels, especially if a 401(k) has significant fees. However, if funds can be rolled over into a Roth IRA without fees, it becomes more attractive. Generally, funds in a Roth account tend to be more advantageous tax-wise for someone over 59 ½ (the age at which you can withdraw earnings without taxes or penalties).

Ultimately, those in their early 60s who can afford to save a little more for retirement should seriously contemplate taking advantage of the higher catch-up contribution limit in 2025. The subsequent years may not present as favorable an opportunity, but catch-up contributions will likely still be beneficial for many individuals.

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