401(k) Tips

How old do you have to be for 401k catch-up?

If you did not save enough during your younger years, you may be allowed to make catch-up contributions to boost your retirement savings. Find out the ideal age for 401(k) catch-up.

3 min read

The US Congress added 401(k) contributions out of the concern that people approaching retirement were not saving enough for their retirement years. Catch-up contributions give older workers a boost through the extra contributions they make to their 401(k) above the regular 401(k) contribution.

The IRS allows workers above 50 to make a catch-up contribution to their 401(k) accounts to compensate for the years they did not save enough. Catch-up contributions allow workers to make extra contributions above the regular 401(k) contributions as they near retirement age. In 2022, workers can contribute $6,500 in catch-up contribution, in addition to the $20,500 annual contribution limit for 401(k). 

401(k) catch-up contribution limit for 2022

The IRS sets contribution limits to a 401(k) each year. In 2022, workers can contribute up to $20,500 to workplace retirement plans like 401(k) and 403(b). Workers who are age 50 or older are eligible to make catch-up contributions of up to $6,500, raising the total 401(k) contributions for the year to $27,000. This means that retirement savers can defer paying taxes on up to $27,000 yearly. This does not include the 401(k) match made by your employer.

If you have a SIMPLE 401(k), you may be allowed to make catch-up contributions if you are above 50. You can make regular contributions of up to $14,000 in 2022, and an additional $3,000 in catch-up contribution in the same period.

The US Congress introduced catch-up contributions as part of the Economic Growth and Tax Relief Reconciliation Act of 2001. While the catch-up contributions were added as a temporary measure for older workers, it became a permanent feature after the enactment of the Pension Protection Act of 2006.

How catch-up contributions work

Workers who qualify to make catch-up contributions must inform the plan administrator to start making the extra contributions. Catch-up contributions are deducted directly from a worker’s pay through salary deferrals.

Generally, an employee is required to keep tabs on their annual contributions to ensure they do not exceed the annual contribution limit. The catch-up contributions should also not exceed the set limit. If the employee contributes more than the annual limit, they must withdraw the excess contribution to avoid incurring penalties. The IRS imposes a 6% penalty for each year the contributions remain in excess. 

401(k) catch-up contribution age

For an employee to be eligible to make catch-up contributions, they must be enrolled in a retirement plan that allows catch-up contributions and be at least age 50 or older. You can make catch-up contributions at any time during the year but before December 31. This means that, if you will turn 50 on December 31, you are eligible to make catch-up contributions at any time during the year even if you are yet to turn 50.

To start making catch-up contributions, you must contact your 401(k) plan administrator to adjust your contribution amount, or access your 401(k) account online. You can update your contribution amount for each pay period to include the additional contribution. You must make the contributions before the end of the year, and NOT before the deadline for income tax returns.

Tax benefits of 401(k) catch-up contribution

One of the tax benefits of making catch-up contributions is the tax savings you will get. Since 401(k) contributions are tax-deferred, your contributions will grow tax-free, and you will only pay taxes when you withdraw funds in retirement. If an older worker contributes the full $27,000 to his/her 401(k) and they are in the 35% tax bracket, they can potentially reduce the tax bill by $9,450.

Making catch-up contributions can significantly boost your overall retirement savings as you head to retirement. Assuming you start making contributions at 50 and retire at 65, and you are earning a 6% annual return, you could add an extra $140,000 to your 401(k) savings. These savings have the opportunity to compound over the years since you won't pay taxes until you withdraw money in later years.

Roth 401(k) catch-up contributions

You can make catch-up contributions to a Roth 401(k) account. If you have both traditional 401(k) and Roth 401(k), you can split salary deferrals between the two retirement plans, but the cumulative contributions should not exceed the annual contribution limit.

Unlike a 401(k) that allows pre-tax contributions, you will have to pay taxes upfront on the Roth 401(k) contributions. You will pay taxes on the regular contributions and catch-up contributions made to a Roth 401(k), and the money will grow tax-free until when you take a distribution in retirement. You won’t pay taxes when you withdraw the Roth contributions and any investment earnings generated over the years.