How 401(k) Catch-Up Contributions Work

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Frontloading your retirement savings when you’re young is a great way to ensure you have enough by the time you quit work for good. But that’s easier said than done. Many people reach mid-life and realize they’re behind.

Luckily, those with access to a 401k may be able to make up some lost ground — and lower their tax bill — with catch-up contributions.

What is a Catch-Up Contribution?

Per IRS rules, American workers can add up to $19,500 to a 401k plan in 2021 (and $20,500 in 2022). Workers over 50 have a chance to bolster their nest egg by making catch-up contributions of up to $6,500 a year. Catch-up contributions are extra savings permitted on top regular 401k contribution limits.

Other tax-advantaged retirement savings plans that allow catch-up contributions include the 403b, most 457 plans, and the federal government’s Thrift Savings Plan. IRAs also allow catch-up contributions, though the annual limit is much lower.

How Catch-Up Contributions Work

Catch-up contributions are available to workers age 50 and older who participate in a 401k plan through their current employer. Like regular 401k contributions, catch-up contributions are made through elective salary deferrals, not lump sum payments or one-off cash contributions.

Salary deferrals are the pre-tax deductions from an employee’s paycheck that go into their 401k account to be invested. Employees are usually responsible for making sure their total yearly contributions stay under the maximum allowed by either the IRS or their employer’s plan. That may involve doing some math ahead of time to determine the right deferral amount per paycheck so they don’t go over the limit and incur a penalty tax.

401k Catch-Up Contribution Limit for 2022

The IRS reviews 401k contribution limits each year to determine when they need to be increased to keep pace with inflation.

Contribution limits stayed the same for 2020 and 2021. For 2022, the regular 401k contribution limit will increase by $1,000 and the 401k catch-up contribution will remain the same.

The chart below shows how much employees can save in a 401k with and without catch-up contributions in 2021 and 2022.

401k Contribution Limit 
401k Catch-up Contribution Limit (for ages 50 and older)
Total Annual 401k Contribution Limit

$19,500 (2021)
$6,500 (2021)
$26,000 (2021)

$20,500 (2022)
$6,500 (2022)
$27,000 (2022)

401k Catch-Up Contribution Example

Catch-up contributions to a 401k are made the same way regular contributions are — through paycheck deductions.

Say you turn 50 in March 2022 and plan to contribute the maximum to your 401k for the year, which is $27,000, and you’re paid biweekly. That requires a deferral amount of $1,125 per paycheck ($27,000 / 24 paychecks = $1,125).

At the end of the year, your plan administrator will classify the amount of your contributions over the regular limit — in the example above that’s $6,500 — as catch-up contributions. They’ll be treated the same as regular contributions for tax purposes.

Try It: 401k Savings Calculator

401k Catch-up Contribution Eligibility

To be eligible to make 401k catch-up contributions, your current employer’s plan has to offer catch-up contributions. Plans that you’re no longer actively enrolled in won’t allow catch-up contributions.

You also need to be eligible to make elective deferrals under your 401k plan. Lastly, you have to be at least age 50 by the end of the year in which you’re making the catch-up contributions. A 50th birthday in December is treated the same as a 50th birthday in March.

Whether due to income constraints or other means of saving, most eligible employees don’t take advantage of catch-up contributions. According to the annual “How America Saves” report, 97% of defined-contribution plans (that includes 401ks) allowed employees to make catch-up contributions in 2020, but only an estimated 15% of eligible plan participants utilized them.

Congressional lawmakers have proposed various changes to catch-up contribution amounts and eligibility. Two separate bills are currently being considered. The House’s version proposes adjusting 401k catch-up contributions annually for inflation and increasing the annual limit to $10,000 for workers ages 62 to 64. However, catch-up contributions would no longer be made on a pre-tax basis like regular 401k contributions. The Senate proposes enacting inflation adjustments as well and implementing a $10,000 catch-up contribution limit, but for workers who are 60 and older.

Tax Benefits of a 401k Catch-Up Contribution

Contributions to a traditional 401k directly reduce the saver’s taxable income (taxes aren’t entirely avoided, though, because you have to pay them when the money is withdrawn in retirement).

Since catch-up contributions are extra savings on top of regular contributions, you can get an even bigger tax deduction in the current year.

For example, consider a 55 year old with a $100,000 pre-tax salary who contributes the maximum annual limit to their 401k in 2022, plus $2,000 in catch-up contributions. Their taxable income would drop to $77,500. As a single filer, that brings their top tax rate from 24% to 22% for the year. When you add in other deductions, such as the standard deduction, taxable income  is reduced even further.

Making extra pre-tax contributions to a 401k means that your full dollar has the opportunity to grow in the market and compound. You won’t pay income taxes until you withdraw the money later.

Read More: Understanding 401k Withdrawal Rules

How to Make 401k Catch-Up Contributions

If you’re eligible, making 401k catch-up contributions should be simple.

First, check with the benefits or 401k administrator at your company to see if there are any specific rules or limitations on catch-up contributions within your plan. The IRS imposes an overall limit that caps total employee and employer contributions — including any matching contributions and profit sharing — to a 401k plan each year. The overall maximum amount that can be added to a 401k (including catch-up contributions) is $64,500 for 2021 and $67,500 for 2022, or 100% of your compensation if that’s lower.

Next, work backwards to figure out how much you need to defer from each paycheck to reach your 401k savings goal for the year. Most plans let you update your deferral rate through your online account.

Roth 401k Catch-Up Contributions

The annual 401k contribution limits set by the IRS (outlined in the chart above) are the sum total of contributions to a traditional 401k and a Roth 401k. Employees who typically split paycheck deferrals between traditional and Roth accounts can do the same for catch-up contributions.

Like regular contributions to a Roth 401k, catch-up contributions are made with after-tax dollars.

Are Catch-Up Contributions Enough?

It’s unlikely that someone who hasn’t saved at all for retirement would suddenly start at age 50 and save more than the annual IRS limit. Still, let’s consider what might happen in this scenario.

Say a 50 year old starts contributing the maximum annual limit ($20,500) plus the maximum catch-up contribution ($6,500) to their 401k in 2022 and continues doing so for the next 15 years until they retire (we won’t factor in the probable inflation-adjusted limits for future years since we don’t know them yet). That’s a total of $27,000 added to their account per year.

Plugging these inputs into the Personal Capital Retirement Planner shows that the investor’s 401k balance would reach about $480,000 by retirement at age 65, assuming a moderate risk tolerance. Unless they’re able to live on less than $65,000 a year, the saver would spend down their balance by age 72. For a longer lasting nest egg, they could also save in an IRA and a brokerage account.

For someone who already has substantial savings in their 401k by the time they’re eligible for catch-up contributions, the extra $6,500 a year could result in a six-figure boost by retirement.

Consider a 50 year old with $600,000 in a 401k. Saving the maximum allowable $27,000 annually would result in a balance of more than $1.3 million by age 65. That nest egg, assuming a moderate risk tolerance and a $65,000 annual income in retirement, would last until age 87. If they didn’t utilize catch-up contributions, their balance at retirement would be about $120,000 lower, lasting until around age 84.

The Bottom Line

Catch-up contributions to a 401k are permitted for most current plan participants who are 50 or older. That means they can add an additional $6,500 of contributions to their 401k if they exceed the $19,500 annual limit for 2021.

Both traditional and Roth 401ks permit catch-up contributions made through paycheck deductions. Contributions to a traditional 401k will also lower your tax bill.

Catch-up contributions can move the needle on retirement preparedness for diligent savers, but some may still need to save more than a 401k allows to fund a comfortable retirement.

Get Started with Personal Capital’s Retirement Planner

 

Author is not a client of Personal Capital Advisors Corporation and is compensated as a freelance writer.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. Compensation not to exceed $500. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money. Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.