Contributing to a 401(k) is a great way to build a solid retirement nest egg over time. And if you're 50 or older, you have an even greater opportunity to build up a large retirement plan balance, since that's when catch-up contributions begin.
But while catch-up contributions for people 50 and over have been around for a long time, thanks to changes under SECURE 2.0, workers ages 60 to 63 can now make a "super catch-up" contribution to their 401(k)s. If you fall into this age range, instead of making the standard $8,000 catch-up contribution this year, you can instead make a catch-up of $11,250, bringing your total allowable 401(k) contribution to $35,750.
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It's an option worth taking advantage of -- even if you're happy with your 401(k) balance to date.
You don't have to be behind to catch up
Catch-up contributions in 401(k)s are often touted as a great option for struggling savers. But in reality, if you're behind on savings by the time catch-up contributions come into play, chances are, it's going to be difficult to take advantage of them.
Let's say you're 49 with only $80,000 saved in your 401(k) because you don't earn such a high salary. Despite being eligible for a catch-up contribution the following year, you may not be able to increase your savings rate all that much if your income doesn't rise.
For this reason, the new super catch-up available to savers ages 60 to 63 may really only benefit folks who are already "caught up" on funding their nest eggs. That's because it takes a pretty high salary to be able to part with $35,750 in a single year for retirement savings purposes.
But that doesn't mean you should forgo that super catch-up if you qualify for it.
For one thing, pumping extra money into your 401(k) gives you that much more flexibility in retirement. Even if you're, say, 60 years old with $2.5 million saved, socking away a few extra thousand dollars this year could result in a lot more money down the line if those funds remain invested and grow.
Furthermore, if you're able to make a super catch-up in a traditional 401(k), you can shield additional income from taxes this year. That's an automatic win.
Be mindful of the new Roth rule
While the super 401(k) catch-up for savers ages 60 to 63 is a fairly new rule, so is the new Roth catch-up rule. That latter rule states that if you're 50 and older earning more than $150,000, you can only make 401(k) catch-ups in a Roth account.
Chances are, if you're able to put $35,750 into a 401(k) this year, your income is high enough that you'll be limited to a Roth catch-up. But it still pays to sock that extra money away, even if you lose the immediate tax break that come with a traditional 401(k).
Roth accounts get to enjoy both tax-free gains and withdrawals in retirement. And with a Roth 401(k), you won't have to worry about that portion of your savings being subject to required minimum distributions.
So all told, the new 401(k) super catch-up is worth taking advantage of -- even if you may not have the option to use your preferred retirement plan type.
