Short On Time? Here’s a Quick Summary:
- Catch-Up Contributions Overview: Workers over 50 can make additional contributions to their qualified retirement plans beyond the standard limits, with contributions up to $30,500 allowed in 2024, compared to the $23,000 limit for younger workers.
- Impact on Retirement Savings: Contributing an extra $7,500 annually into a tax-deferred retirement account can significantly increase the eventual account balance and retirement income, as illustrated by a hypothetical comparison showing greater longevity of the account with catch-up contributions.
- Withdrawal and Tax Considerations: Upon retirement, withdrawals from 401(k) accounts begin, with required minimum distributions starting at age 73. Withdrawals are taxed as ordinary income and may incur penalties if taken before age 59½.
Catch-Up Contributions
A recent survey found that 18% of workers are confident about having enough money to live comfortably through their retirement years. At the same time, 36% are not confident.1
In 2001, congress passed a law to help older workers compensate for lost time. However, only some may understand how this generous offer can add up over time.2
The “catch-up” provision allows workers over 50 to contribute to their qualified retirement plans over the limits imposed on younger workers.
How It Works
Contributions to a traditional 401(k) plan are limited to $23,000 in 2024. 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 $30,500 in 2024.3
Setting aside an extra $7,500 yearly in a tax-deferred retirement account can significantly increase the account’s balance and, by extension, its income. (See the 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 in 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 $30,500 in contributions a year.
Upon retiring 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. The IRS regularly updates these maximum contribution limits.
This hypothetical example is used for comparison purposes and is not intended to represent any investment’s past or future performance. Fees and other expenses were not considered in the illustration. Actual returns may vary.
Both accounts assume an annual rate of return of 5%. The rate of return on investments will vary over time, particularly for longer-term investments.
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. Withdrawals from your 401(k) or other defined contribution plans are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty.