Catch-Up Contributions

A recent survey found that 28% of workers are very confident about having enough money to live comfortably through their retirement years. At the same time, 27% are not confident.1

In 2001 congress passed a law that can help older workers make up for lost time. But few may understand how this generous offer can add up over time.2

The “catch-up” provision allows workers who are over age 50 to make contributions to their qualified retirement plans in excess of the limits imposed on younger workers.

How It Works

Contributions to a traditional 401(k) plan are limited to $22,500 in 2023. Those who are over age 50 – or who reach age 50 before the end of the year – may be eligible to set aside up to $30,000 in 2023.3

Setting aside an extra $7,500 each year into a tax-deferred retirement account has the potential to make a big difference in the eventual balance of the account, and by extension, in the eventual income the account may generate. (See accompanying chart.)

Catch-Up Contributions and the Bottom Line

This chart traces the hypothetical balances of two 401(k) plans. The blue line traces a 401(k) account into which $22,500 annual contributions are made each year. The red line traces a 401(k) account into which an additional $7,500 in contributions are made each year, for a total of $30,000 in contributions a year.

Upon reaching retirement at age 67, both accounts begin making withdrawals of $7,000 a month.

The hypothetical account without catch-up contributions will be exhausted before its beneficiary reaches age 80. Keep in mind, the IRS regularly updates these maximum contribution limits.

Damian Sylvia - Retirement - New Jersey

Damian Sylvia
Retirement Income Solutions
Office: 732-508-6044
Direct: 732-284-0902
Email: Damian@MyFinancialSolution.org
Website: RetirementSolutionsNJ.com

Sources:

1. EBRI.org, 2022
2. Economic Growth and Tax Relief Act of 2001
3. IRS.gov, 2023. Catch-up contributions also are allowed for 403(b) and 457 plans. Distributions from 401(k) plans and most other employer-sponsored retirement plans are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. In most circumstances, you must begin taking required minimum distributions from your 401(k) or other defined contribution plan in the year you turn 73.