Catch Up Contributions 401 K: 8 Must-Know Benefits

Catch Up Contributions 401 K

Catch-up contributions to the 401(K) investment funds employers provide allow employees to contribute extra amounts to the fund. However, this benefit is only available once the investor has crossed the age limit of 50 years.

So, the main catch is that if you feel like your retirement is nearby and want to save more money for a secure retirement, you can make a catch-up contribution to your 401 (K) plan. But that would require you to cross the threshold of 50 years of age. 

Employees above 50 can increase their retirement investment thanks to the catch-up contribution limit to their 401 (K) plan

What Is Catch-Up Contribution 401 (K)?

What Is Catch-Up Contribution 401 (K)

The USA employers provide their employees with a great retirement investment vehicle for retirement through 401 (K) investment. However, there is a limit as to how much one can save in their 401 (K) investment plan.

According to 2022 rules, the employee’s 401 (K) contribution limits were $20,500 as a standard contribution limit. In 2023, it was changed to $22500. However, through catch-up contributions, employees can increase the standard limit and invest up to 30,000 annually. So, that makes an amount of $7500 as the catch-up contribution 401 (K) limit. 

The IRA allows investors aged 50 or above to add $1000 more to their regular contribution limit. The catch-up contribution 401 (K) limit for 2023 allows you to add $6500 on top, making it $7500.

According to Forbes Advisor, the average median earning of a USA employee is $64428. So, if you are matching the standard limit on 401 (K) contributions, then, according to the average US salary, that makes more than 34% of one’s salary. 

To top it up with another $7500 would require one to put almost 50% of their yearly income. This begs the question, should you max out on your 401 (K) contributions? It depends on your situation.

But, if you are over 50 years of age and can afford the standard match and even more for catch-up contribution, then you should go for it. 

Catch-Up Contributions 401k: Eligibility

The eligibility for catch-up contributions starts with your employer’s 401k plans. The ‘How America Saves report by Vanguard’ in 2022 has confirmed that 98% of US employers have catch-up contributions enabled for their employees. 

However, employees need to be at least 50 years old by the calendar year or cross that age limit to be eligible. According to this plan, employees aged above 50 are allowed to save $1,000 yearly on top of their regular contributions. But the 2023 limit allows them to add $6500 more on top of the standard 401k limit of $22500.

Should You Make Catch-Up Contributions?

If you have a good salary and are already doing well in terms of other financial contributions, catch-up contribution is worth considering. The majority of the workers do not earn too much to take advantage of the increased limit through catch-up contributions. However, if you have a decent income and fulfill the eligibility criteria for catch-up contributions, then you should make catch-up contributions. 

Advantages Of Catch-Up Contributions 401 (K)

Here are the different benefits of Catch contribution –

1. Pre-Tax Deductions

If you are a professional sitting at the pinnacle of a high-income tax bracket, you can use 401 (K) catch-up contributions to decrease your taxable income. The catch-up deductions can be made on a pre-tax basis. So, it can reduce your taxable income in the process.

Also, if the catch-up contribution is deducted from your pre-tax income, then the income tax on it will not remain due until you withdraw it from the 401 (K) retirement. But when you withdraw that money during your retirement, you will be under a lower tax bracket. 

2. Enhance Your 401 (K) Compounding

It is not possible to calculate or project how much your compounded investment will reflect down the line due to catch-up contribution. One obvious reason for that is a volatile investment market. 

But, if you have more money invested between the ages of 50 and 65, you will have the benefit of compounding more for a longer time. Undoubtedly, it will give an investor a smaller gap between the expected cash flow and the projected expenses. 

3. Automatic Withdrawals

Similar to regular 401 (K) deferrals, catch-up contributions can be transacted automatically through elective salary deferrals. Thanks to the benefit of automatic deduction, there is no need to do it manually and take extra tension. 

4. Contribute To A Roth 401 (K)

Catch-up contribution is a method that allows you to invest in a Roth 401 (K) aside from investing in a traditional 401 (k). Roth 401 (K) does not provide immediate tax breaks. However, withdrawals during retirement will provide you with tax benefits like tax-free withdrawals. 

5. Late Savers Are Covered

Catch-up contribution provides a second chance to secure and increase your retirement funds. Many employees start their professional lives with a low income that gradually increases over time. 

Your fifties might be more prosperous than your early 30s, and if you want, you can increase your retirement savings after 50s thanks to 401 (K) catch-up contributions. The additional space in the 401(K) fund after 50s will help you accelerate and boost retirement savings

6. Contribute Throughout The Year

There is no reason to wait till you turn 50 on your birthday. You can start with catch-up contributions from the calendar year of your birth. This allows you to spread your contribution throughout the year. 

7. Get Ready For An Employer’s Match

So, you have turned 50 and are planning to start with your catch-up contribution. Have you checked up with your HR yet? Who knows, according to your employer’s 401(k) plans, you might be eligible for an employer’s match. 

8. 401 (K) Loan Benefits

We have good news if you have to take 401(k) loans after you start with catch-up contributions. The additional investment through catch-up contribution is counted as your balance when considering a 401(k) loan. 

Final Verdict

Workers who have crossed their 50s and are more concerned about their retirement savings can consider a catch contribution 401k. However, they should also assess their capabilities to put more money into their 401 (K) funds. No one knows how much time we have left, but preparing for a longer journey is always wise. So, if that would take more investment in 401 (K) funds, then you should not hesitate. 

If this article was insightful, please consider sharing it with your colleagues who might need the insight. Thank you for reading.

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