Retirement is a major life change and financial planning helps smooth the transition. With that observation in mind, do you remember the Secure 2.0 legislation passed in late 2022? That piece of legislation was aimed at boosting retirement savings. Several major provisions go into effect next year —2024 — and being aware of them may help with your retirement planning, like catch-up contributions.

Marketplace senior economics contributor Chris Farrell joined David Brancaccio to break down the changes. Below is an edited transcript of their conversation.

David Brancaccio: Ketchup on your fries, right? But for those saving for retirement, and that person is old enough, there’s a different kind of catch-up …

Chris Farrell: Yeah, it’s actually a little bit harder than ketchup on your fries, by the way, David. So, two decades ago, Congress said, let’s have this catch-up contribution for workers that are 50 years or over, if you’re in an employer-sponsored retirement savings plan. And the latest figures for those who are 50 years and older is that they can put in an additional contribution of $7,500. Now, David, that’s on top of the maximum of $22,500 per year that anyone can put into a company sponsored 401(k) plan.

Brancaccio: So the regular amount plus the catch-up extra equals $30,000 that you could save if you had the money to do that each paycheck.

Farrell: Right. Most workers ages 55 to 64, with access to an employer sponsored retirement savings plan, they’ve only set aside enough to generate a few hundred dollars a month in retirement income. And if you look at the Federal Reserve data, it suggests that the typical near retiree has $144,000 in retirement savings. The mutual fund company Vanguard found that the typical worker near retirement has $71,000 in their 401(k). So, in the Vanguard study, only 16% took advantage of the catch-up feature. And not surprisingly, they are among the better paid employees who were already putting the maximum into their retirement savings plan.

Brancaccio: But for those who can put the catch-up money in, hear ye hear ye. If you’re 50 and older, this catch-up provision is changing for next year!

Farrell: So, for 401(k) participants earning $145,000 or more in the prior year, that catch-up contribution will no longer be made in tax deductible dollars. That catch-up portion will be made in after tax Roth contributions. So, to make that clear, you’ll pay taxes on those catch-up contributions upfront, but you won’t pay any taxes on any gain when the money is withdrawn in retirement. And by the way, the shift is probably to the benefit of most people since this allows for greater tax diversification with the retirement savings.