Catch-up contributions: What they are and how they work

Catch-up contributions are an opportunity for those ages 50 and older to save additional money for their retirement on a tax-advantaged basis. The increase is designed for the saver who may have gotten a late start on their retirement savings or was forced to delay their contributions for some reason. The additional savings allow them to “catch up.”

You can, however, work to catch up even if you don’t feel like you’ve fallen behind. These contributions are for anyone who is looking to maximize their ability to save for their retirement while enjoying benefits on their tax bills, either now or in the future. Simply put, catching up can help you get further ahead with your long-term financial goals.

How catch-up contributions work

If you’ve been contributing money to a retirement plan, such as a traditional IRA or Roth IRA, you’ve been adhering to annual limitations put in place by the IRS throughout the early part of your career. Catch-up contributions raise that ceiling, allowing for more tax-advantaged growth as you get closer to your final day at work.

Your eligibility for catch-up contributions begins in the calendar year you turn 50 — not once you actually turn 50 — which means that late-year birthdays can max out their contributions before hitting the half-century mark. If, for example, you turn 50 in July next year, you are eligible for catch-up contributions beginning on Jan. 1, 2025.

Consider the limit for IRA contributions for those 50 and older in 2024: $8,000, which represents $1,000 in additional catch-up contributions. An extra $1,000 might not sound like a major difference, but those additional annual payments add up.

Let’s look at a saver who recently turned 50 and has already been contributing the maximum of $7,000 to an IRA. By putting in an additional $1,000 each year until age 60, and keeping it invested until age 80, it boosts the nest egg by about $35,000, assuming a 5 percent rate of return. That return may fluctuate, but the math is clear: Playing catch up can play a crucial role in creating a winning savings plan.

Bankrate’s suite of retirement calculators can help you estimate what catch-up contributions can do for your savings.

Catch-up contribution amounts by account

The IRS sets up catch-up contribution limits, which vary based on your retirement arrangement. These amounts apply through the end of 2024. Keep in mind that these limits may change in 2025.

How to make catch-up contributions

If you’re investing in a traditional or Roth IRA through a brokerage or a mutual fund company, you should automatically see a reflection of your increase in available contributions. You can make these extra contributions over the course of the year, or you can add a sum of money prior to the date your taxes are due. The same goes for retirement plans for the self-employed, such as Simple IRAs and SEP IRAs.

With an employer-sponsored plan, such as a 401(k), though, you may need to take some additional steps once you become eligible for these additional contributions.

• Get in touch with your benefits department on day one: You may need to opt in for the ability to take advantage of catch-up contributions. Be sure to contact the appropriate person in charge of administering your plan. Otherwise, your employer might automatically stop collecting your contributions once you hit the $23,000 threshold.
• Plan ahead: You’re planning for your retirement, but you will also need to do some planning in the present for your catch-up contributions. Calculate how many paychecks you have remaining in the year and how much more you need to contribute to reach the limit. If your intention is to contribute as much as possible, you don’t want to fall short of the limit because you didn’t contribute enough per paycheck.
• Budget accordingly: Let’s say you hit the $23,000 limit in early November. If you still want to allocate an additional $7,500 to your 401(k), you only have a few pay periods remaining. This will require some hefty contributions around a time when you might also be doing some end-of-year holiday shopping. Make sure your short-term spending plan is in line with your long-term saving strategy. Adjusting your budget for a couple of months might come with some frustrations, but decades later, you’ll recognize it was a wise decision.
• Pick when your tax benefits shine: Decide whether to make your contributions on a pre-tax or Roth basis. Some employers offer Roth 401(k) plans, which have no income limits. So, no matter how much you’re earning right now, by accumulating assets in a Roth 401(k), you’ll be able to enjoy tax-free withdrawals when you retire.

Bottom line

Catch-up contributions can be a great way to save additional money for retirement once you reach age 50. The savings boost can help anyone looking to meet their retirement goals, but is especially important if you didn’t save enough earlier in your career. Additional savings in the years leading up to retirement can help make your golden years all you’ve imagined them to be.

— Bankrate’s Brian Baker contributed to an update of this story.