Retirement savers age 50 and older get to put extra tax-advantaged money into their 401(k) accounts than the standard annual contribution limits. Those additional savings are known as “catch-up contributions.”
If you have a 401(k) at work, taking advantage of catch-up contributions is key to making the most of your plan, especially as retirement approaches. Here’s a closer look at how 401(k) catch-up limits work.
Related: How to open your first IRA
What Is 401(k) Catch-Up?
A 401(k) is a type of defined contribution plan. This means the amount you withdraw in retirement depends on how much you contribute during your working years along with any employer matching contributions you may receive (and how those funds grow over time).
There are limits on how much employees can contribute to their 401(k) plan each year as well as limits on the total amount that employers can contribute. The regular employee contribution limit is $19,500 in 2021 and $20,500 in 2022. This is the maximum amount you can defer from your paychecks into your plan unless you’re eligible to make catch-up contributions.
Under Internal Revenue Code Section 414(v), a catch-up contribution is a contribution in excess of the annual elective salary deferral limit. As of 2021 and 2022, the 401(k) catch-up contribution limit is $6,500. That means if you’re eligible to make these contributions, you would need to put a total of $26,000 in your 401(k) in 2021 and $27,000 in 2022 to max out the account. That doesn’t include anything your employer matches.
Congress authorized catch-up contributions for retirement plans as part of the Economic Growth and Tax Relief Reconciliation Act of 2001 ( EGTRRA). The legislation aimed to help older savers “catch up” and avoid falling short of their retirement goals.
Originally created as a temporary measure, catch-up contributions became a permanent feature of 401(k)s and other retirement plans following the passage of the Pension Protection Act in 2006.
Who Is Eligible for 401k Catch-Up?
To make catch-up contributions to a 401(k), you must be 50 or older and enrolled in a plan that allows catch-up contributions, such as a 401(k). The clock starts ticking the year you turn 50. So even if you don’t turn 50 until Dec. 31, you could still make 401(k) catch-up contributions for that year, assuming that your plan follows a standard calendar year.
Making Catch-Up Contributions
If you know that you’re eligible to make 401(k) catch-up contributions, the next step is coordinating those contributions. This is something with which your plan administrator, benefits coordinator or human resources director can help.
Assuming you’ve maxed out your 401(k) regular contribution limit, you’d have to decide how much more you want to add for catch-up contributions and adjust your elective salary deferrals accordingly. Remember, the regular deadline for making 401(k) contributions each year is Dec. 31.
It’s possible to make catch-up contributions, whether you have a traditional 401(k) or a Roth 401(k), as long as your plan allows them. The main difference between these types of plans is tax treatment:
- You fund a traditional 401(k) with pre-tax dollars, including anything you save for catch-up contributions. That means you’ll pay ordinary income tax on earnings when you withdraw money in retirement.
- With a Roth 401(k), regular contributions and catch-up contributions use after-tax dollars. This allows you to withdraw earnings tax-free in retirement, that’s a valuable benefit if you anticipate being in a higher tax bracket when you retire.
You can also make catch-up contributions to a solo 401(k), a type of 401(k) used by sole proprietorships or business owners who only employ their spouse. This type of plan observes the same annual contribution limits and catch-up contribution limits as employer-sponsored 401(k) plans. You can choose whether your solo 401(k) follows traditional 401(k) rules or Roth 401(k) rules for tax purposes.
401(k) Catch-Up Contribution Limits
Those age 50 and older can make catch-up contributions not only to their 401(k) accounts but also to other types of retirement accounts, including 403(b) plans, 457 plans, SIMPLE IRAs and traditional or Roth Individual Retirement Accounts.
The IRS determines how much to allow for elective salary deferrals, catch-up contributions, and aggregate employer and employee contributions to retirement accounts, periodically adjusting those amounts for inflation.
Here’s how the IRS retirement plan contribution limits for 2021 and 2022 add up.
These amounts only include what you contribute to your plan or, in the case of the defined contribution maximum, what your employer contributes as a match. Any earnings realized from your plan investments don’t count toward your annual or catch-up contribution limits.
Keep in mind as well that employer contributions may be subject to your company’s vesting schedule, meaning that you don’t own them until you’ve reached certain employment milestones.
Putting money into a 401(k) account through payroll deductions is one of the easiest and most effective ways to save money for your retirement. To determine how much you need to put into that account, it helps to know how much you need to save for retirement.
If you start your contributions early, you may not need to make catch-up contributions, but if you’re age 50 or older, taking advantage of 401(k) catch-up contributions are a great way to turbocharge your tax-advantaged retirement savings.
Of course, you can also add to your retirement savings with an IRA. While a 401(k) has its advantages, including automatic savings and a potential employer match, it’s not the only way to grow retirement wealth.
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