IRA Catch-Up Contributions Haven't Budged in Years. They're About to Change Soon

That's great news for retirement savers.

Many people inevitably get a late start on retirement savings. And it's easy to see why.

A lot of us spend our 20s trying to dig out of credit card debt and save up to buy a home. In our 30s, we're busy trying to keep up with our mortgage payments and juggle childcare costs. And in our 40s, we're forced to focus on college savings so our kids don't wind up in debt like we did.

As such, it's easy to see how someone might reach their 50s without having saved as much for retirement as they would've wanted. Thankfully, the IRS allows older savers to make up for lost time via catch-up contributions.

Once you turn 50, you can put an extra $1,000 into an IRA account on top of that year's limit for younger savers. So as an example, in 2023, the IRA contribution limit for workers under age 50 is $6,500. But if you're 50 or older, you get a $1,000 catch-up opportunity that raises your annual contribution limit to $7,500.

The problem with IRA catch-ups, though, is that they haven't budged for years. Rather, they've been stuck at the $1,000 mark.

A new rule, however, is changing that. And it should open the door to added savings among those looking to make more progress in building their retirement nest eggs.

IRA catch-up contributions will soon be tied to inflation

The annual base IRA contribution limit changes every year in line with inflation. But the $1,000 catch-up has worked differently. Unlike the base amount (which is $6,500 this year), catch-up contributions haven't been tied to inflation, which explains why the IRA catch-up has been stuck at $1,000 for many years.

But thanks to the recently passed SECURE 2.0 Act, starting in 2024, IRA catch-up contributions will be adjusted on a yearly basis to account for inflation just like the base contribution. So all told, in time, older savers should get a chance to boost their contributions even more.

Who's eligible for catch-up contributions?

The purpose of catch-up contributions may have initially been to give workers who fell behind on savings a chance to pump more money into their retirement accounts. But to be clear, you don't need to be behind on savings to take advantage of IRA catch-up contributions.

Once you reach the age of 50, you're eligible to put an extra $1,000 into your IRA each year (and potentially more, once that $1,000 is adjusted for inflation). It doesn't matter if, at that point, you're sitting on $12,000 in savings or $1.2 million. As soon as you turn 50, you get to contribute more.

But if you are behind in funding your IRA, then it definitely pays to take advantage of the catch-up option. Not only will it help you close out your career with more money for your senior years, but it can also, in the case of a traditional IRA, exempt more of your income from taxes on an ongoing basis. And that's a benefit you don't want to pass up.