Catch-up contributions are a fantastic opportunity for individuals aged 50 and above to increase their retirement savings in a tax-efficient manner. This option is ideal for those who may have started saving for retirement late or had to pause contributions for various reasons, allowing them to “catch up.”
Even if you don’t feel like you’re behind on saving for retirement, you can still take advantage of catch-up contributions. These additional contributions are beneficial for anyone looking to maximize their retirement savings while enjoying tax benefits either now or in the future. Essentially, catching up can accelerate progress towards your long-term financial objectives.
Understanding catch-up contributions
If you’ve been contributing to a retirement plan like a traditional IRA or Roth IRA, you’ve been following the IRS’s annual limits early in your career. Catch-up contributions raise this limit, enabling more tax-deferred growth as you approach retirement.
You become eligible for catch-up contributions in the calendar year you turn 50, not on your actual birthday. This means that individuals with birthdays later in the year can maximize their contributions before turning 50. For instance, if you turn 50 in July next year, you can start making catch-up contributions on January 1, 2025.
Consider the 2024 IRA contribution limit for individuals 50 and older: $8,000, including an additional $1,000 for catch-up contributions. While an extra $1,000 may not seem significant, these annual additions can accumulate over time.
For example, let’s say you’re 50 and have been contributing the maximum $7,000 to an IRA. By adding an extra $1,000 each year until age 60, and leaving it invested until age 80 with a 5% return rate, your nest egg could increase by around $35,000. While returns may vary, the impact of catching up on contributions is clear in bolstering your savings plan.
Bankrate’s range of retirement calculators can assist in estimating the benefits of catch-up contributions on your savings.
Catch-up contribution limits by account type
The IRS sets catch-up contribution limits based on your retirement account type, applicable until the end of 2024. Note that these limits may change in 2025.
| Contribution Limit | Catch-up Contribution | Total Contribution | |
|---|---|---|---|
| 401(k) | $23,000 | $7,500 | $30,500 |
| Traditional IRA | $7,000 | $1,000 | $8,000 (requires at least $8,000 of earned income) |
| Roth IRA | $7,000 | $1,000 | $8,000 (requires at least $8,000 of earned income) |
| Simple IRA | $16,000 | $3,500 | $19,500 |
How to contribute to catch-up contributions
If you’re investing in a traditional or Roth IRA through a brokerage or mutual fund company, you should see an increase in your contribution allowance. You can make these additional contributions throughout the year or add a lump sum before your tax deadline. The same applies to self-employed retirement plans like Simple IRAs and SEP IRAs.
For employer-sponsored plans like 401(k)s, you may need to take additional steps once eligible for catch-up contributions.
- Contact your benefits department immediately: Opt-in for catch-up contributions by reaching out to the plan administrator. Otherwise, your employer might stop collecting contributions once you hit the $23,000 threshold.
- Plan ahead: Calculate the remaining paychecks in the year and the additional contributions needed to reach the limit. Ensure you contribute enough per paycheck to maximize your savings potential.
- Adjust your budget: If you reach the $23,000 limit early, plan for hefty contributions in the remaining pay periods. Align your short-term spending with long-term saving goals to avoid falling short of your contribution limit.
- Choose your tax benefits wisely: Decide between pre-tax or Roth contributions based on your financial goals. Roth 401(k) plans offer tax-free withdrawals in retirement, regardless of your current income level.
Conclusion
Catch-up contributions are a valuable tool for boosting retirement savings after turning 50. Whether you’re aiming to meet retirement goals or make up for lost time, these additional savings can enhance your financial security in your golden years.
— This article was updated with contributions from Brian Baker at Bankrate.