What Are Catch-up Contributions

Catch-up contributions allow those 50 years old and above to contribute additional money into their 401(k) plan or IRA.

It allows people in this age group to make up for the lost time by making larger retirement account contributions at an advanced age. 

Catch-up contributions are limited to 100% of earned income. It must be made in addition to the regular annual contribution you make plus any amount designated by your employer if they offer catch-up contributions. 

Catch-up contributions can only be applied during one tax year and within a specific time frame before turning 50. It can be used to contribute for the previous year and the current tax year.

To take advantage of catch-up contributions, you must have received income from working. If your employer does not offer this option, then you cannot receive it through them either.

Catch-up contributions are limited and should only be used if you need to catch-up for lost time or missed contributions.

How Does It Work?

Catch-up contributions are designed for retirement plans, such as 401ks or 403bs. 

Catch-up provisions allow employers to include this feature within the employer’s defined contribution (DC) plan and enable employees who have not contributed the maximum allowed by law in prior years to make “catch-up contributions” during the current tax year. 

Catch-up provisions are not available for defined benefit (DB) plans, which means that you cannot catch-up if your plan is a DB plan. 

It is because your employer sets aside enough money each year to pay fixed retirement benefits at the normal retirement age. 

Catch-up contributions allow employees to defer more money each year than is otherwise allowed by law. 

Catch-up provisions enable people who, for whatever reason, have not contributed the maximum amount into their 401k or 403b in prior years to do so now and enjoy tax savings on the increased contribution amounts. 

Catch-up rules apply only if you are over 50 years old.

How to Make Catch-Up Contributions?

It is important to meet the IRS or your organization’s maximum annual contribution before you can participate in catch-up contributions.

To make these catch-up contributions, you will need to contact your plan administrator or access the account online. 

You can select this option at any time and change how much money will go into each payroll contribution if necessary- so there’s no risk of delay.

Catch-Up Contribution Limits

The key difference between the different types of retirement plans is how much you can contribute. Health savings accounts offer a catch-up provision, but their age limit is 55 rather than 50 years old.

Below are the contribution limits, the catch-up limits, and the total limit for each type of account in 2021.

Catch-up Contribution Limits

 

If you’ve been saving for retirement and have the extra income in your 50s or 60s, maxing out those accounts can help make a healthy retirement. 

If you’re already at that point where it doesn’t seem like there’s any more room to save, you can use some catch-up contributions to retire a few years earlier.

Benefits of Making Catch-Up Contributions

Catch-up contributions are intended for those who have not taken advantage of the maximum contribution amount in previous years.

It can be used with any retirement plan, including 401ks and 403bs. Catch-up rules apply only if you are over 50 years old. 

Catch-up Contributions increase your tax-deductible savings to allow you to save more for your retirement. 

It can help you retire a few years earlier. If your employer does not offer this option, then you cannot receive it through them either.

The Bottom Line

If your company offers a 401k plan with Catch-Up Contributions enabled, you can save more money than you would have been able to in prior years. 

Catch-up provisions allow you to save more money during your career and enjoy a larger retirement nest egg when it comes time to stop working for good.

Catch-up contributions are additional money that can be contributed to an existing retirement plan. Catch-up provisions allow employers to include this feature within the employer's defined contribution (DC) plan and enable employees who have not contributed the maximum allowed by law in prior years to make "catch-up contributions" during the current tax year.
Catch-up contributions enable employees who have not contributed the maximum allowed by law in prior years to make "catch-up contributions" during the current tax year. For example, older workers may wish to contribute additional money towards their retirement plan because they are close to retirement and do not want to stop working entirely before turning their desired retirement age.
Catch-up provisions apply if you're over 50 years old. Catch-up contributions allow employees to defer more money each year than is otherwise permitted by law. Catch-up rules also apply only if the plan permits catch-up contributions and contains no prohibition on such contributions.
There are many benefits to making catch-up contributions. The most obvious benefit is that doing so allows you to save more money for retirement. Additionally, if your employer matches contributions, making catch-up contributions could increase the size of your match. Doing so may also enable you to reduce the number of years over which you intend to take distributions from your plan and avoid paying taxes on these additional amounts for a more extended period.
Catch-up provisions are only available if the plan permits catch-up contributions and contains no prohibition on such contributions. Employers may also establish a schedule for initiating the new provision. Once the plan is amended, employees must be given notice of the new provision.
True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.