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If you have a tax-advantaged retirement account, you likely also have a contribution limit. That means you can only kick in up to a certain amount each year. But if you're nearing retirement age, these contributions may not be enough to give you the funds to feel comfortable in retirement. That's where retirement catch-up contributions come in.
Retirement catch-up contributions allow people who are 50 or older to make additional deposits that go beyond these limits. They're designed to help folks nearing retirement put more muscle behind their savings. If they were unable to make adequate contributions during their working years and want to bump up their account balances now, catch-up contributions can help them do that. Let's get into the details of how they work.
Catch-Up Contribution Limits
If you're 50 or over at the end of the calendar year, you can make annual catch-up contributions to certain retirement accounts. Some participants could contribute up to $6,500 in extra funds in 2022. Here's how it shakes out for these common retirement accounts.
| Eligible Retirement Account | Annual Contribution Limit | Catch-Up Contribution Limit |
|---|---|---|
| 401(k) | $20,500 | $6,500 |
| Traditional IRA | $6,000 (across all IRAs) | $1,000 (across all IRAs) |
| Roth IRA | $6,000 (across all IRAs) | $1,000 (across all IRAs) |
| Simple 401(k) | $14,000 | $3,000 |
| Simple IRA | $14,000 | $3,000 |
| 403(b) | $20,500 | $6,500 |
| 457(b) | $20,500 | $6,500 |
Catch-up contributions can translate to significant tax advantages. That's because some accounts allow you to deduct contributions on your tax return. This typically includes 401(k)s and traditional IRAs. That means every dollar you put in effectively reduces your taxable income for the year.
How Do You Make Retirement Catch-Up Contributions?
To make catch-up contributions, you'll first want to clarify which type of retirement accounts you have.
Employer-sponsored accounts like 401(k)s are typically funded with pre-tax dollars via automatic payroll deductions. With a 401(k), you'll need to contact your plan administrator to increase the contributions that will come out of your paycheck. Have an upcoming bonus headed your way? You might also direct some or all of it into your 401(k).
Retirement accounts that you handle on your own are a different story. Most traditional IRAs and Roth IRAs, for example, can be funded electronically from your bank account or paycheck. You decide how much you want to contribute, as long as it's within the annual contribution limit. Another option is making lump-sum catch-up contributions at your own discretion.
When Are Retirement Catch-Up Contributions a Wise Move?
Your personal financial situation will determine if catch-up contributions make sense for you. It could be worthwhile if:
- You're behind on your retirement target and want to pad your nest egg.
- You've come into a cash windfall.
- Your budget can easily accommodate higher contributions.
- Your contributions are tax-deductible and you want to reduce your taxable income for the year.
Retirement catch-up contributions have their benefits, but they aren't always a wise financial move. Will contributing more strain your monthly budget? And how might catch-up contributions impact your ability to save for other financial goals? If you're paying down high-interest debt or building your emergency fund, those extra dollars might be put to better use elsewhere.
The Bottom Line
Retirement catch-up contributions allow folks who are 50 and older to contribute beyond regular annual contribution limits. It's one way to bolster your nest egg before you retire. Depending on the type of account you have, it might also reduce your taxable income today. Just be sure that higher contributions gel with your budget and won't impact your other financial goals.
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