How 401(k) Catch-Up Contributions Can Help You Save

The common advice around saving for retirement is to start as early as possible. If you didn’t start contributing toward your retirement when you were younger, there are systems in place to help you, like 401(k) catch up contributions. When you reach a certain age, you are able to contribute more than the regular limit to “make up” for lost time. To take advantage of a 401(k) catch up, you will need to understand what your new contribution limits are, and to strategize about some ways you can afford to put more toward retirement.

What Are Catch-Up Contributions?

People age 50 and older can make “catch-up contributions” to their 401(k) or IRA retirement accounts to help make up for earlier years when they weren’t saving as much (or at all). Catch-up contributions can exceed the typical contribution limits put in place by the IRS. However, there is still a limit that people will need to adhere to.

In addition to potentially increasing how much you get through an employer match program, you can generally contribute more to a 401(k) than other retirement accounts like an individual retirement account (IRA), helping you put more toward your nest egg.

IRS 401(k) Catch-Up Contribution Limits For 2023

If you are 50 years and older, you can contribute an extra $7,500 in the 2023 calendar year, on top of the normal contribution limit of $22,500. In other words, if you are 50 years and up, you can contribute up to $30,000 in 2023 in your 401(k). This limit is higher than other retirement accounts. Traditional and Roth IRAs, for instance, only have a catch-up contribution of $1,000, on top of the regular $6,500 contribution limit.

Benefits Of 401(k) Catch-Up Contributions

There are many potential benefits of making catch-up contributions to a 401(k). One of the main ones is you can take advantage of employer matches while you’re still working. Depending on where you work, some employers will match up to a certain percentage of contributions from your paycheck. Essentially, this is “free” money toward your retirement.

Other benefits include:

• Pretax contributions: Traditional 401(k)s allow you to contribute pretax dollars, lowering your taxable income and helping you pay less in taxes. You can use the savings toward other goals. Keep in mind that you will need to pay taxes when you take distributions in retirement, so speak with a tax professional for guidance.
• Accelerated savings: The main point of catch-up contributions is to increase the amount you can save toward retirement. This is especially helpful if you are concerned you won’t have enough money by the time you reach retirement.
• Consistent contributions year-round: Since your 401(k) contributions are deducted from your paycheck, you’re almost guaranteed to make consistent contributions regularly. Even with catch-up contributions, the additional amount may not feel as large since it’s broken down into smaller chunks per paycheck.
• More compounding: The more you have in your retirement account, the more you can take advantage of compounding interest, helping you to grow your nest egg.

How You Can Make 401(k) Catch-Up Contributions

To start making catch-up contributions, look at your budget to determine how much more you can contribute. While it makes sense to save as much as you can toward retirement, you want to make sure you have enough to meet your financial needs now, too.

Once you determine how much extra to contribute, speak with your employer or plan administrator to change your contribution amount. In most cases, you’ll have to increase the amount per paycheck, and will only have until the end of the calendar year to make your contributions. Check with a tax professional to determine the deadlines for catch up contributions, and other ways you can boost your retirement savings.

The Bottom Line

Making catch-up contributions to your 401(k) when you are 50 or older can make a lot of sense, particularly if you believe you won’t have enough when it comes time to retire. If you are able to do so, you can contribute up to an additional $7,500 per year on top of the regular contribution limit of $22,500. By having more in your 401(k), you can take advantage of compounding interest, and potentially increased employer match contributions, among other benefits.

As much as this type of employer-sponsored retirement plan is a useful tool for your golden years, there are other ways to save for retirement. Finding the extra cash can feel like a challenge, but using tools that track your spending can help you spot expenses you can cut back on or eliminate.

Sign up for Rocket Money℠ today to find other ways to save money.