As we near a new year, normal increases in the amount you can contribute to your retirement plan aren’t the only changes you may see. There’s now a super-sized catch up available for those closest to retiring, and you may have the ability to direct the company match to help pay off bills.
Normal increases based on inflation
In 2025, you will be able to contribute up to $23,500 in your retirement plan account, such as a 401(k) or 403(b). If you are age 50 or older, you can make a catch-up contribution of $7,500 making your total contribution $31,000. Note that the catch-up did not increase due to inflation.
Super catch-up contribution
Nerdwallet reports that the median retirement plan account value for those age 55 to 64 is just $185,000. To help alleviate this, you may make a larger catch-up contribution to your retirement account if you are age 60 to 63. The formula is pretty simple: the limit is either $10,000 or 150% of the standard catch up contribution, whichever is higher. So for 2025, you can contribute $11,250 ($7,500 x 1.5) in addition to the normal $23,500 limit in your retirement plan. If you’re ages 50 to 59, or 64 or older, your maximum contribution in 2025 with the catch up would be $31,000. If you’re ages 60 to 63, you can contribute up to $34,750. Since this is an optional feature, check with your employer to see if your company allows the super catch-up.
Direct your match
The IRS recently ruled that one company could allow their employees to choose how to use their 401(k) match. Instead of simply investing the money into the retirement account, the employees will be able to decide where to allocate their matching funds. If they make no choice, the funds would go as before into their retirement account.
As you can tell from that paragraph, there’s a lot left unsaid (including which company was allowed to offer this). This is being seen as a trial balloon, with other companies and the IRS watching to see how it works. However, some in the financial industry see a benefit to allowing employees to delegate their company match dollars to repaying a student loan, or perhaps helping with a healthcare bill.
You can imagine the benefit: an employee who can’t contribute enough to receive the full company match might be able to contribute more if the match can go to pay off onerous bills. The hope here is that the employee would keep contributing at the same level after those bills have been paid. On the other hand, if an employee chooses to direct their company match away from their 401(k), they would lose the power of compounding on that money and may have less when they decide to retire.
There’s a reason these accounts are called retirement accounts. The goal is to help people regularly save for decades in the hopes of having a comfortable retirement. Yet the IRS seems to be attempting to balance the concern people have with locking up their money in a retirement account with easier access to that money. I wrote before about the $1,000 withdrawal available in some plans. This made it much easier to access your retirement account for things such as a car repair or accident. Now there’s a chance to redirect the match. While just one company has been approved for this, both employers and the IRS should think long and hard about the ramifications of turning retirement plans into ATMs.
Photo by N. Voitkevich