What Is a 401(k) Catch-Up Contribution?

Whether you’ve been saving on a regular basis throughout your career or started to set aside money for retirement a little late, you’ll probably want to be able to stash more cash in your tax-advantaged retirement plan every year. Fortunately, you can do so if you’re 50 years old or above. Out of concern that older Americans weren’t saving enough for retirement, the United States Congress made a catch-up contribution option available in retirement plans, including 401(k) plans. Below is a comprehensive guide to over-50 401(k) catch-up contributions.

What Is a 401(k) Catch-Up Contribution?

As part of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA), the catch-up provision for 401(k) and other retirement plans was created to make it easier for older individuals to save enough money for retirement. A 401(k) catch-up contribution allows individuals who are 50 and above to contribute higher amounts to their 401(k) accounts when they’re nearing retirement age.

The 401(k) catch-up contribution amount is higher than the standard maximum contribution limit. The contribution is an elective deferral an eligible participant makes that exceeds the statutory limit of $23,000 (as of 2024), employer-imposed plan limit, or any limit imposed that complies with the Actual Deferral Percentage (ADP) nondiscrimination test.

If you’re planning to make 401(k) extra contributions, your account will most likely have to undergo amendments to facilitate the 401(k) catch-up contribution option. The IRS provides model amendment language for 401(k) catch-up contribution eligibility, but you should check with your record-keeper or legal counsel to find out the 401(k) catch-up rules that apply to your specific plan. It’s important to note that 401(k) catch-up contribution rules vary from those that apply to 403(b), 457, and IRA plans.

If you meet the requirements for eligibility for 401(k) catch-up contributions, you’ll make catch-up contributions to your account through payroll deduction. According to the IRS, you can report 401(k) pretax catch-up contributions and regular contributions together on W-2 forms.

What is the Max Catch-Up Contribution for 401(k)?

The limit for catch-up contributions in 2024 is $7,500. This limit applies to 401(k), Roth, and IRA catch-up contributions. If you’re making an IRA or Roth catch-up contribution, you can contribute up to $1,000 more if you’re 50 or above and your taxable compensation isn’t less than $8,000. If your taxable compensation is less than $8,000, you can contribute only up to an amount equal to your taxable compensation.

If you’re trying to understand what a Roth catch-up contribution or IRA catch-up contribution is, you need to know that the amount you’re allowed to contribute to your account depends on your federal income tax filing status and modified adjusted gross income (MAGI). Below is a list of contribution limits for people of different tax filing statuses and MAGIs.

• If you’re a married person filing jointly or an eligible widow or widower and your MAGI doesn’t exceed $240,000, you’re allowed to contribute up to the limit.

• If you’re a married person filing jointly or an eligible widow or widower and your MAGI is in the range of $204,000 to less than $240,000, you’re allowed to make a lower contribution.

• If you’re a married person filing jointly or an eligible widow or widower and you have a MAGI of $240,000 or more, you aren’t allowed to contribute anything.

• If you’re married person filing separately and have lived with your spouse for any amount of time during the tax year and you have a MAGI of less than $10,000, you’re only allowed to make a lower contribution.

• If you’re married person filing separately and have lived with your spouse for any amount of time during the tax year and you have an MAGI of $10,000 or more, you aren’t allowed to contribute anything.

• If you’re single, married but filing separately, or the head of your household; you didn’t live with your spouse at all during the tax year; and your MAGI doesn’t exceed $161,000, you’re allowed to contribute up to the limit.

• If you’re single, married but filing separately, or head of household; you didn’t live with your spouse at all during the tax year; and you have a MAGI of $161,000 or more, you’re only allowed to make a lower contribution.

• If you’re single, married but filing separately, or head of household; you didn’t live with your spouse at all during the tax year; and you have a MAGI of $161,000 or more, you aren’t allowed to contribute anything.

Regardless of your retirement plan, you can start making catch-up contributions in the year you turn 50, even before your birthday. In order to be eligible to make 401(k) age-50 catch-up contributions, your regular plan contributions need to reach your plan’s deferral limit, annual deferral limit, or the annual ADP limit for employees with high compensation. Contribution limits may go up over time, usually once every one or two years.

Benefits of Catch-Up Contributions

The limit for catch-up contributions is relatively generous across all retirement plans. For example, if you turn 50 this year and you’ve already reached the limit for your individual 401(k) account, you can grow your account to $20,330 by the following year if the annual return on your 401(k) investments is 7%. However, if you make the full catch-up contribution, your account can grow to $27,705. If your employer matches your contributions, you can gain even more.

How to Make Catch-Up Contributions to 401(k)

If you want to start making 401(k) age-50 catch-up contributions, you’ll have to notify the administrator of your plan or access your account online. You can elect to make catch-up payments to 401(k) at any time and select a different amount to contribute if necessary. You’re required to make catch-up contributions to your 401(k) account before the end of the year. However, if you’re making IRA catch-up contributions, you can do so at any time before the deadline for filing your income tax, which is typically around mid-April.

If you want to know more about catch-up contributions for 401(k) retirement plans, feel free to speak with the experts at Human Interest.