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Secure 2.0 Legislation Would Make Retirement Catch-Up Limits More Generous for Some. Here's Who Would Really Benefit

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  • Individuals approaching retirement may be able to put away more catch-up money, if a proposal becomes law.
  • But the benefits of such a change would likely be concentrated among high-income retirement plan participants.
  • Higher contribution limits may not help those who need it most, those who are behind on their retirement savings.

Catch-up contributions for retirement savers could get more generous for certain savers, if legislation proposed in Congress becomes law.

But the benefits of the increased limits will likely be concentrated among higher-income plan participants.

Today, preretirees ages 50 and up can put away an extra $6,500 toward retirement through 401(k), 403(b) and similar plans. That's in addition to the $20,500 limit all participants can contribute in 2022.

Secure 2.0, which was passed by the House of Representatives, proposes raising the catch-up contributions limits to $10,000 for savers ages 62, 63 and 64. The proposals also calls for treating the catch-ups as post-tax, rather than pretax, contributions.

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In addition, it would also raise the catch-up contribution limits for SIMPLE retirement plans to $5,000, from $3,000. In 2022, all workers in those plans can contribute up to $14,000.

Those catch-up contribution limits would be adjusted annually to the cost of living. The legislation also proposes indexing individual retirement account catch-up limits, currently $1,000 for savers 50 and up.

Experts tout the benefits of maxing out retirement contributions. But not all workers can afford to fully take advantage of those savings targets, including workers who are approaching retirement and eligible for higher limits.

A Vanguard study found only 12% of workers in the firm's retirement plans contributed the maximum $19,000 permitted that year. Moreover, only 15% of workers age 50 and over eligible to make additional $6,000 catch-up contributions participated in that feature.

Participants who did make catch-up contributions tended to have higher incomes and bigger retirement account balances, the research found.

Of retirement plan participants with more than $150,000 in income, six in 10 made catch-up contributions in 2019, according to Vanguard. Among those earning more than $250,000, four in 10 made catch-up contributions.

A 2015 report from the Center for Retirement Research at Boston College found few retirement plan participants are affected by the savings caps for retirement plans. Thus, raising them would not help alleviate the problem of low savings rates.

People who are behind on their retirement savings would not need the catch-up feature, said Alicia Munnell, director at the Center for Retirement Research. Instead, they could just save more under the current rules, because often they are very far from the max, she said.

The proposals in Secure 2.0 will not go a long way to helping address the retirement savings shortfall, she said.

"I think it's a giveaway to high-income people basically through the catch-up, through the increase in the age at which you take your required minimum distribution, more gifting capability," Munnell said.

"Anything you can slip in there to make it more balanced across the income scale would be a great improvement," she said.

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