What Are Catch-Up Contributions? [Are They Worth It?]

If you’re nearing retirement age or wondering how to make the most of your savings. One option is to make catch-up contributions. I’ve been making catch-up contributions since turning 50 last year. So if you’re wondering how to start making catch-up contributions, what they are, and how they work, keep reading as I’ll explain everything I’m doing to make the most of my retirement savings.

What Are Catch-Up Contributions?

Catch-up contributions are designed to help individuals aged 50 and over save more money for their future by allowing them to contribute additional funds to their retirement accounts beyond the regular maximums set by the IRS. This is usually done in 401(k)s, IRAs, and HSAs (Health Savings Accounts).

If you’re behind the eight-ball in terms of retirement savings. You should take advantage of these extra contribution limits to compensate for lost time and ensure your golden years are financially secure.

I started making catch-up contributions last year, and I’ll share everything I’ve learned.

How Do Catch-Up Contributions Work?

The IRS sets maximum contribution limits for retirement accounts. Based on the contribution history, the amounts increase by $500 every two years. Catch-up contributions are an elective deferral that allows anyone 50 or older to make additional contributions beyond the regular limits.

In 2022, individuals aged 50 were allowed to squirrel away an extra $1,000 for a Roth IRA, an extra $6,500 for employee contribution limits, $3,650 for single HSA members, and up to $7,300 if they have a family.

Catch-up contributions provide an excellent opportunity for those behind in their retirement savings to catch up. They also incentivize those who have been saving diligently for years and now have the extra cash to invest. 

If you haven’t been able to save as diligently due to life circumstances. You can read my money story here. It may be worth making sacrifices today to have a better tomorrow. 

Making the Most of Catch-Up Contributions

The beauty of catch-up contributions is that they allow anyone 50 and older to take advantage of additional savings limits beyond what the IRS sets – which is excellent news if you’re behind on saving for your retirement.

However, it’s essential to understand that catch-up contributions are elective deferrals, not tax-free ones.

That means you’ll need to pay income taxes on these contributions when you withdraw them in retirement. 

However, don’t let that stop you. It’s still worth taking advantage of them as the extra money you can save now will benefit you in the long run.

Last year was the first year I could make catch-up contributions. It allowed me to invest $7,000 in my Roth and $27,000 in my solo 401k with a $1500 employer contribution. I’ll be sharing my contributions with you if you want to follow me to my first 100k.

My goal is to contribute up to the catch-up limit every year so that I can further secure my retirement and take advantage of the additional tax benefits.

Who Is Eligible for Catch-Up Contributions?

As mentioned above, the IRS allows anyone who is age 50 at the end of the calendar year, can begin making catch-up contributions.

For example, the Roth IRA contribution limits require that you have an earned income. Your filing status must be single or married, filing jointly. 

You can also make catch-up contributions to a Traditional IRA regardless of your income level if you meet the age requirement.

You can also make catch-up contributions to an HSA if you have a high deductible health plan (HDHP) and your filing status is single or married, filing jointly.

I just signed up with a high-deductible health insurance plan on the Health Insurance Marketplace, aka Obama care. 

I plan to open up my HSA, but that depends on how Lowe’s insurance policy looks for part-time employees. 

I’ll update you on what I decide to do after orientation and learn more about Lowe’s benefits. My orientation begins tomorrow. 

Other Ways to Catch Up

The Special 457B allows anyone within three years of the normal retirement age to be eligible for the Special 457(b) 3-year Special Catch-Up election. 

For example, in 2022, the Special 457(b) catch-up limits enabled those eligible to save up to $41,000 of catch-up contributions.

In 2023, those eligible can invest up to $45,000 in a traditional or Roth retirement account. These catch-up contribution limits were amended by the Pension Protection Act of 2006. 

It allows participants to save up to double the maximum of the prior three years of retirement savings.

That said, the special governmental 457 (b) plan is designed for non-profit, local, and state employees such as; firefighters, police officers, and civil servant employees. 

If you’re considering getting a job to invest in one of these plans, check with your employer if it is a qualified retirement plan.

How Do Catch-Up Contributions Work?

Catch-up contributions allow individuals to contribute more money beyond the usual maximums for their retirement accounts. 

For example, the standard contribution limit for a Roth IRA is $6,000 in 2022. But with catch-up contributions, you can add an extra $1,000.

The same principle applies to 401’s HSAs and other retirement accounts.

How to Make Catch-Up Contributions?

Making catch-up contributions is simple and easy. In fact, you don’t need to do anything on your part but provide the correct birthdate when you open a new account. I use Vanguard for my Roth IRA and Fidelity for my solo 401k.

When I turned 50, I could invest an additional $1,000 in my Roth IRA and an extra $6,500 in my solo 401k. Here’s an image of what the limits look like on the Vanguard app.

Vanguard catch up contribution limits

I’ve been using Vanguard for the past 4 years, and their system ensures you don’t invest too much. This is nice because I don’t want to worry about penalties if I put too much into my accounts. 

For instance, when you turn 50, you’ll notice that you can invest up to $7,000 in 2022. This number will increase to $7,500 in 2023. 

As soon as you start investing, Vanguard automatically adjusts the amount you can invest for the rest of the year. I love that I don’t have to worry about keeping up with how much I’ve invested for the year.

I’m sure Fidelity and the other investment brokers have similar systems. However, I can only speak for Fidelity and Vanguard, as those are the companies I use for my retirement accounts. 

You can also make catch-up contributions to your employer-sponsored retirement plan if you’re an employee. 

All you need to do is ask your HR department for a catch-up contribution form and submit it before the end of the year if you want the contributions to count towards that year’s limit.

Types of Accounts That Allow Catch-Up Contributions And Amounts?

The IRS catch-up contribution limits will vary depending on the type of account. Here’s a table with some of the different retirement accounts and catch-up contribution limits. Keep in mind, these are not all the available retirement accounts you can use, so it’s important to understand all the different types of accounts available.

Account2023 Contribution Limit 2023 Catch-Up Contribution2023 Total Contribution
401k$22,500 for employee contributions$7.500 (in addition to employee and employer limits)$66,000 combined employee and and employer contributions. Those over 50 can can contribute $30,000 to the employee contribution.
Traditional IRA$22,500 for employee contributions$7.500 (in addition to employee and employer limits)$66,000 combined employee and and employer contributions. Those over 50 can can contribute $30,000 to the employee contribution.
Roth IRA$6,500 for anyone under 50 years old.$7,500 in roth IRA with catch up contributions.Anyone with earned income and does not exceed the income limit set by the IRS, can invest in a Roth IRA.

These limits change yearly; you can check the IRS website for the latest ones.

Are Catch-Up Contributions Worth It?

The answer is different for everyone. 

For me, yes, because I’m way behind on how much I should have in my retirement.

However, if you’ve been following the FIRE (Financial Independence Retire Early) strategy and maxing out your 401k contributions every year since you turned 20. You may not need to make catch-up contributions.

Looking at your account balances is the best way to know if you should make catch-up contributions. 

Do you have enough money saved up to retire comfortably in retirement? If not, then catch-up contributions might be worth considering.

Hopefully, you know how much you’ll need to retire. 

For example, if you need $40,000 per year, then based on the 4% rule, you’ll need 1 million dollars saved. Compare that to your current account balances, and if there’s a big gap, then catch-up contributions could be a solution.

Catch-up contributions can help you get closer to retirement faster by adding extra money into your accounts each year. 

It may not seem like much at first, but these extra contributions can make a big difference over time.

If you’ve been diligent in saving, making the catch-up contribution on your Roth accounts is never a bad idea. 

These accounts offer tax advantages that your traditional 401k does not.

You pay taxes on the money you contribute now, but when it comes time to withdraw in retirement, you don’t have to pay any additional taxes.

There are a lot of factors to consider when deciding if catch-up contributions are worth it for you and your current financial situation.

Strategies For Making Catch-Up Contributions

Whether or not you can make catch-up contributions will depend on whether you can afford it.

If you’re fortunate to have a high-paying job or a side hustle, you won’t have any problems making catch-up contributions. 

However, if you’re living paycheck to paycheck and unable to save, you’ll have to adjust your budget and make some cutbacks.

Here’s what I’m doing to make catch-up contributions to my 401k.

  • Side Hustle: I’ve turned a side hustle blog business (not this blog) into a full-time gig. It has taken me a long time to earn money from my hustle, but I can now put more money into my 401k each month.
  • Part-Time Job: This year, I’ve decided to get a part-time job to save and invest more of my blog income and use the JOB income to pay my bills. My orientation begins today, so I’m a little nervous about going back to work after being out of the job force for over 13 years. But I have a five year plan, so that’s my motivation to muster through it all.
  • Setting a Budget: I’ve started budgeting and spending more wisely. Knowing how much I make and where my money is going allows me to invest more and put every dollar to work for me.

Everyone’s financial situation is different. 

If you’ve reached the catch-up contribution age, you’re closer to retirement than you think. Unfortunately, this means you may have to make sacrifices today that you wouldn’t have had to take if you were in your 30s.

Final Word

Catch-up contributions are a great way to maximize your retirement savings if you’re approaching or already in your golden years. 

You can contribute more money to your 401(k), IRA, and HSA once you reach certain age limits set by the IRS. These limits vary from account to account but can provide a much-needed boost if you find yourself behind in your retirement savings goals.

I’m about to turn 51 this year. So I will take advantage of catch-up contributions to ensure my golden years are financially secure. 

I hope to continue making catch-up contributions every year until I hit 65 years of age or until my account balances reach my desired retirement income.

Do your research and determine the best course of action for you and your financial situation. 

Making catch-up contributions are worth it and can help bridge the gap to a comfortable retirement, but only if it fits into your budget and other goals.

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