Article Highlights:
1. Health Savings Accounts (HSAs)
2. Strategic Roth IRA Contributions
3. Contributions Beyond Age Barriers
As retirement approaches, many older Americans look for ways to increase their savings and maintain financial stability. Retirement plans frequently include "catch-up" contributions, an often-overlooked opportunity to considerably increase retirement savings. This article examines several retirement plans and their catch-up features, focusing on major prospects for older taxpayers as they approach retirement.
SEP IRAs are intended to be a simple, tax-efficient solution for self-employed individuals and small company owners to save for retirement. Contributions are tax deductible, and investments grow tax-deferred, resulting in efficient long-term savings growth.
SEP IRAs, unlike 401(k)s and SIMPLE IRAs, do not include catch-up contribution provisions for senior taxpayers. Instead, SEP IRAs are differentiated by their relatively high contribution limits, which allow individuals to save aggressively as they approach retirement age.
As of 2025, the maximum contribution to a SEP IRA is the lesser of 25% of the employee's compensation or $70,000. This high cap allows older Americans to aggressively fill their retirement accounts, making up for the lack of a structured catch-up contribution mechanism.
For 2025, the typical employee voluntary contribution maximum for SIMPLE IRAs and SIMPLE 401(k) plans is $16,500. Participants over the age of 50 may make an extra catch-up payment of $3,500, increasing the total allowable contribution to $19,000. This age-based provision is especially useful to people who want to boost their retirement funds in the last stretch before retiring.
However, commencing in 2025, the Secure 2.0 Act includes a specific provision for donors aged 60, 61, 62, or 63. The catch-up contribution maximum for these individuals is $5,000 or 50% more than the standard catch-up amount, resulting in a $5,250 cap in 2025. The increased amounts will be linked for inflation after 2025.
Eligibility for these catch-up payments is determined by your age on December 31 of the given year: if you are 59 at the start of 2025 and turn 60 by the end of the year, you are eligible for the enhanced catch-up contribution. If you are 63 at the start of the year and 64 by the end, you are ineligible for the increase under this clause.
Employer Matching- SIMPLE plan rules require employers to pay one of the following contributions:
1. Matching Contribution: A dollar-for-dollar match of up to 3% of the employee's pay. This encourages full engagement by rewarding employees who make contributions to their accounts.
2. Non-Elective Contribution: A 2% contribution to the employee's remuneration, independent of the employee's own contributions. This ensures that even employees who cannot contribute the maximum amount receive a boost to their retirement accounts.
Cash or deferred arrangements (CODAs), sometimes known as "401(k)" plans (after the Internal Revenue Code provision that governs such plans), allow an eligible employee to defer a portion of their payroll into a 401(k) retirement account. The maximum amount permitted each year is increased for inflation, and for 2025 it is $23,500. For taxpayers 50 and over, there is a $7,500 catch-up amount, allowing them to contribute up to $31,000 in 2025.
However, the Secure 2.0 Act includes a specific provision for contributors aged 60, 61, 62, or 63. For these individuals, the catch-up contribution ceiling has been increased to $11,250, bringing their total contribution cap to $34,750 in 2025. This strategy attempts to provide more significant advantages to persons reaching retirement age by assisting them in increasing their retirement funds.
Eligibility for these catch-up payments is determined by your age on December 31 of the given year: if you are 59 at the start of 2025 and turn 60 by the end of the year, you are eligible for the enhanced catch-up contribution. If you are 63 at the start of the year and 64 by the end, you are ineligible for the increase under this clause.
Catch-up contributions are an excellent way for persons with 403(b) Tax-Sheltered Annuity (TSA) accounts to considerably improve their retirement funds.
403(b) accounts are retirement savings programs intended largely for employees of public schools and certain tax-exempt organizations, such as churches and non-profits. These plans provide tax-deferred growth on contributions, allowing participants to save up to $23,500 per year in 2025, adjusted for inflation.
Catch-up contributions are a unique feature of 403(b) plans. The normal catch-up provision permits those 50 and older to contribute an extra $7,500 per year over the ordinary contribution limits. This enables older people to increase their contributions and accelerate their savings growth as they near retirement age.
Furthermore, the "15-Year Rule" provides an additional layer of benefits for long-term employees. If you have completed at least 15 years of service with a qualifying employer, you may be eligible for an extra contribution of up to $3,000 per year, subject to certain lifetime limits. This provision is especially beneficial to those who have dedicated their careers to education or other qualifying occupations, providing greater freedom and savings potential.
Furthermore, like 401(k)s, TSAs are subject to a specific provision under the Secure 2.0 Act that allows additional contributors for plan participants aged 60, 61, 62, or 63, bringing the maximum contribution for 2025 to $34,750.
HSAs offer a unique and powerful triple tax advantage: contributions are tax-deductible, growth is tax-free, and withdrawals for eligible medical costs are tax-free. This unique combination not only lowers taxable income during active working years, but also allows the account to grow over time, similar to the tax benefits of standard retirement funds such as IRAs and 401(k)s.
HSA withdrawals for non-medical expenses become penalty-free at age 65, but they are taxable as income, just like standard IRA payouts. This feature gives retirees the freedom to choose how they spend their money, whether to cover medical expenses, supplement their income, or meet other personal financial requirements.
Older workers can also undertake strategic Roth conversions, which include shifting funds from a traditional IRA or other retirement plan to a Roth IRA. This method, which is commonly used in lower-income years, can minimize future taxable RMDs while also allowing for tax-free withdrawals in retirement.
Maximising contributions to retirement savings necessitates careful tax planning. Please do not hesitate to contact this office for specialized guidance on how to optimize your retirement potential.