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Over 50? How catch-up contributions work

Over 50? How catch-up contributions work

September 27, 2023

If you are nearing retirement and have fallen short of your savings goal, it’s not too late to play catch up with your finances.

In fact, the federal government wants to help. So, it allows people to make additional retirement contributions in their later years.

Catch-up contributions defined

The Internal Revenue Service allows individuals who are age 50 or older by the end of the calendar year to make extra pre-tax contributions to their work-sponsored retirement plan account(s), including their 401(k), 403(b), Salary Reduction Simplified Employee Pension Plan, or governmental 457(b).For tax year 2023, the catch-up contribution limit is $7,500 on top of the $22,500 pre-tax limit for all savers.

Catch-up contributions also exist for IRAs. In tax year 2023, those 50 and older can save an additional $1,000 to their traditional or Roth IRA, above and beyond the baseline $6,500 annual limit for all eligible workers. (Calculator: What will my income be in retirement)

SIMPLE IRA, or SIMPLE 401(k), plans may also permit catch-up contributions up to $3,500 in 2023, on top of the limit for younger workers.

And finally, employees with at least 15 years of service may be eligible to make additional contributions to their 403(b) plan beyond the regular catch-up for those ages 50 and older. Also known as a tax-sheltered annuity (TSA) plan, a 403(b) is a retirement plan for some employees of public schools, employees of certain tax-exempt organizations, and certain ministers.

Effective, if used

“Catch-up contributions are one of the most attractive means of saving for retirement,” said Melissa Labant, director of tax policy and advocacy for the American Institute of CPAs in Washington, D.C. “I don’t think most people are aware it exists.”

Indeed, a 2020 survey by Vanguard found that 98 percent of employers offer catch-up contributions in their 401(k) plans, but only 15 percent of eligible employees take advantage.1 (Employers that sponsor 401(k) plans are not required to offer catch-up contributions, but a majority of them do.)

A few thousand dollars in annual pre-tax retirement savings may not sound like much, but it has the potential to accumulate quickly with the magic of compounded growth, said Labant. That can help to mitigate longevity risk, a serious threat to many baby boomers. (Related: What’s your retirement plan for living longer?)

According to a recent Bankrate survey, 55 percent of Americans said their retirement savings are falling short, with nearly 35 percent indicating that they’re “significantly behind” and another 20 percent reporting that they’re “somewhat behind” on their financial goals.2

The survey also found that age is strongly correlated with how Americans feel about their retirement readiness, with pre-retirees and current retirees self-reporting that they are the most behind on their savings:

  • Gen Z: About 31 percent said they’re ahead, while 30 percent said they’re behind.
  • Millennials: About 19 percent said they’re ahead, while 46 percent said they’re behind.
  • Gen X: Just 9 percent said they’re ahead, while 65 percent said they’re behind.
  • Baby boomers: Only 7 percent said they’re ahead, while 71 percent said they’re behind.

Catch-up contribution math

“It’s never too late to start saving,” said Labant.

For example, a 50-year-old earning $75,000 per year with no prior retirement savings could potentially boost their future 401(k) balance from $735,000 to $981,000 — an increase of $245,000 — by making catch-up contributions until their full retirement age at 67. That assumes they achieve a 7 percent average annual return and continue to max out their 401(k) until they retire.

Catch-up contributions yield another potential benefit as well, said Labant. They lower your taxable income in the year you contribute, which may render you eligible for deductions that were phased out at the higher income threshold, she said.

“Deferring that income could be advantageous because you are most likely in a higher tax bracket while working than when you retire,” said Labant.

Coming up with the cash to make extra contributions may be easier than you think.

Those nearing retirement are often in their peak earnings years and may have fewer demands on their income — their kids are finishing college and their mortgage may be paid. They may also be able to pay down debt and reduce their monthly spending to help stretch their retirement savings. ( Calculator: How much should I save for my retirement? )

By saving a bigger piece of their income pie in the years leading up to retirement, those age 50 and older can help make up for lost time.

To further ensure a comfortable retirement, they may also wish to delay Social Security when they reach retirement age to boost their future financial benefit.

“Save as much as you can as early as you can, but if you haven’t saved enough don’t forgo this opportunity,” said Labant. “Check with your employer to see if they allow catch-up contributions and if so take advantage.”

1 Vanguard, “How America Saves 2020,” June 2020.

2 Bankrate, “55% of working Americans say they’re behind on retirement savings,” Oct. 24, 2022.