Don't Mess With Taxes

Some older workers can contribute even more in catch-up contributions to their workplace retirement plans starting in 2025. (Photo by Andrea Piacquadio)

Welcome to the first work day of 2025!

At least it’s a short week. And some folks also are thinking about the day they no longer have to return to an office at all.

The start of a new year is a good time to focus on your eventual retirement. To ensure that your post-work years are what you want, you need to start or continue saving.

The Internal Revenue Code (IRC) can help, thanks to the various tax-favored retirement accounts it covers.

And a change this year to a popular workplace retirement plan can help some older workers become super savers.

Tax-favored retirement savings: If your workplace offers a 401(k) retirement savings plan, which gets its moniker from the section of the IRC that created and governs it, take full advantage of it.

The same workplace savings advice applies to public school teachers and employees of nonprofits, whose defined contribution plans work similarly, but are covered under different IRC sections and have those code section names.

They are 403(b) plans for some nonprofits and teachers, 457 plans for certain government employees, and Uncle Sam's Thrift Savings Plan (TSP) for civil service employees and retirees, as well as for members of the uniformed services. For simplicity’s sake, and a lower word count, I’m going to refer to these plans collectively as 401(k)s.

Regardless of the plans’ names, check into the option to open one where you work and start contributing.

Meet the match: Most employers that offer any of these plans, either a traditional tax-deferred or a Roth version funded with already taxed dollars, also match the amount their employees contribute up to a certain percentage.

There’s no requirement that companies match workers’ 401(k) contributions, so there’s no set match amount. But the typical employer match is between 3 percent and 6 percent, and can be set up in a variety of ways.

For example, a company might contribute $1 for every $1 an employee contributes up to 3 percent of their salary, and then 50 cents on the dollar for the next 2 percent.

Once you know the most that your employer will match, be sure to contribute at least that amount so as not to waste the added retirement dollars.

Then consider contributing more to your tax-favored workplace retirement account.

Put in more if possible: While your contribution guide probably will be your personal budget, it’s always good to know the maximum you can contribute just in case you’re able to do so.

One year, the hubby got raise that provided us enough to live on that I could max out my 401(k) contributions. Just that one year of maximum contributions has made a big difference in our overall retirement stash.

If you are able to contribute more, you need to know the 401(k) et al contribution limits, which also are adjusted for inflation.

For 2025, it is $23,500.

Older workers can catch up more: The workplace plans also allow older workers to add more. The catch-up contribution limit in 2025 for employees aged 50 or older and who participate in these plans remains in 2025 at the 2024 limit of $7,500.

The math means that many participants age 50 or older in these workplace plans can contribute a maximum in 2025 of $31,000.

And some specific older workers get an even bigger catch-up contribution limit, thanks to the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2022, popularly known as SECURE 2.0.

The sweeping retirement law allows employees aged 60, 61, 62, and 63 in 2025 to contribute $11,250 instead of $7,500. That could bump their plan amounts by $34,750.

SECURE 2.0 also says that these special amounts for sexagenarians will be indexed for inflation starting in 2026.

Make retirement moves now: The key to an enjoyable retirement is preparation. And money.

As discussed in this post, those two retirement factors meet when you save today in a tax-favored retirement account, like the plan offered at your job.

You can find more about 2025 changes to workplace plans and other retirement savings options, such as IRAs and plans for the self-employed, in my post Law changes, inflation boost benefits of tax-favored retirement plans. (Yes, I am following through on my threat promise on the January 2025 Tax Tips page, tip #2, to remind y'all of the inflation numbers that were announced late last year.)

Whichever retirement account you choose, the sooner you start putting money into it — early in a new year, perhaps? — the longer those savings have to grow tax-deferred or tax-free.

You also might find these items of interest:

• Digging a little deeper into the 2025 Social Security COLA
• Political, tax issues complicate Roth IRA conversion decision
• 9 states join Uncle Sam in taxing at least some Social Security benefits

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