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Catch-Up Contributions: A Game Changer for Your Retirement

July 10, 2024

Catch-up contributions in retirement

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 illustration

 

 

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.

 

 

1. EBRI.org, 2023

2. Economic Growth and Tax Relief Act of 2001

3. IRS.gov, 2024. Catch-up contributions also are allowed for 403(b) and 457 plans. Distributions from 401(k) plans and most other employer-sponsored retirement plans are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. 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.

 

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.