Catch-Up Contributions

What is a catch-up contribution?

If you got a late start on saving for retirement, you may be able to “catch up” with something known as a catch-up contribution. Catch-up contributions are types of retirement savings contributions that enable people who are 50 years old or older to make additional contributions to their 401(k) and IRA accounts. When this kind of contribution is made, the total contribution may be greater than the standard contribution limit.

In 2022, people 50+ can contribute an additional $1,000 to their IRAs on top of the standard $6,000 limit. The catch-up contribution limit for 401(k) accounts is $6,500 on top of the annual $20,500 limit.

How do catch-up contributions work?

The catch-up contribution provision was created by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), empowering older workers to save more of their earnings for retirement. Originally, the catch-up contributions under this act were set to expire at the end of 2010, but the Pension Protection Act of 2006 made them permanent.

Catch-up contributions are made through elective salary deferrals, similar to standard 401(k) contributions. They are not lump sum or one-time contributions.

To start using the catch-up contribution benefit, you must be at least 50 years old. Contact your retirement account plan administrator and tell them you’d like to increase your contributions to take advantage of these higher contribution limits.

Catch-up contributions case study

Estelle was a stay-at-home mom for 25 years. During that time, she did not have a retirement account and she wasn’t saving—or making—any money to contribute. When her kids left for college, Estelle and her husband got a divorce. She started to become increasingly worried about her future and how she would fund her retirement. So, she got a job with 401(k) benefits. Since Estelle’s main goal of becoming employed was saving for retirement, she spoke with her HR manager about her options. Since Estelle was 51 years old, the HR manager recommended she take advantage of catch-up contributions. Estelle listened to her and contributed the maximum amount every year. Now, she’s confident she’ll be able to retire comfortably when she turns 65.

The bottom line

Not everybody takes advantage (or is in a place to take advantage of) employer-sponsored 401(k) accounts from their very first day of work. This fact can compromise their retirement goals. But this is where catch-up contributions come in, allowing people 50+ to contribute more to their retirement accounts with the goal of saving faster in order to retire at a reasonable age by allowing them to contribute an additional $6,500 to their 401(k) if they exceed the 2022 $20,500 limit. Traditional and Roth 401(k) accounts allow catch-up contributions via paycheck deductions. You’ll also benefit from a lower tax bill when you make these contributions to a traditional 401(k) account.

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