4 Reasons It’s a Good Idea To Catch-Up Contributions to Your 401(k)?
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Sean Bryant
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T. Woods
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If you’ve fallen behind on your retirement savings, catch-up contributions are a great way to get back on track and build the nest egg you need for a comfortable retirement.
Keep reading as we discuss exactly what catch-up contributions to your 401(k) are and some of the reasons why you should make them as soon as you’re eligible.
What are 401(k) catch-up contributions?
Early on in life, you might have had a lot of big expenses. You were probably saving to purchase a home, pay for your kid’s activities, and save for their college tuition. Being able to contribute as much as you needed to your retirement accounts might have been challenging. Now that you’re further on in your career and life, you might have some extra flexibility in your budget. That’s where catch-up contributions become important.
Once you reach 50, you’ll be eligible to make catch-up contributions to your 401(k) account. This allows you to contribute an additional amount of money each year to grow the balance faster and bring it back in line with what you need to be to comfortably retire.
But while you’re allowed to make extra contributions each year, there are still some limits to be aware of.
- 2024 401(k) Contribution Limit: $23,000
- 2024 401(k) Catch-up Limit: $7,500Â
Combining the standard contribution limit and the catch-up limit, you can save a total of $30,500. This is a significant percentage of the average worker’s salary.
Reasons You’ll Want to Make Catch-up Contributions
1. Contributions are Made Pre-tax
The biggest reason why you’ll want to take advantage of catch-up contributions is because they’re made pre-tax. This means you’ll be able to reduce your tax liability today, and you won’t pay taxes on the contributions until they’re withdrawn in retirement. You may be in a lower tax bracket at that point, making the savings even more significant.
However, because of the SECURE 2.0 Act of 2022, starting in 2026, all workers earning more than $145,000 per year must invest all catch-up contributions into a Roth 401(k). This means you’ll no longer receive the tax deduction; instead, you’ll be able to withdraw the proceeds tax-free.
2. Speed up Compounding Interest
One of the biggest benefits of saving early and often is taking advantage of compounding interest. Unfortunately, you’ve missed out on some of those opportunities since you fell behind on your retirement savings early in your career. However, with catch-up contributions, you can start taking advantage of that again from age 50 until your retirement.Â
3. You Can Contribute to a Roth 401(k) For Potential Savings
Depending on your situation, you might be able to benefit from making your 401(k) and catch-up contributions into a Roth 401(k) account. This won’t allow you to reduce your tax liability today, but you can withdraw the funds tax-free during retirement. This could be especially beneficial if you think your tax bracket will stay the same over even increase after retirement.
4. Potential Employer Match
You’ll want to check with your employer, but your catch-up contributions may be eligible for an employer match which could help you boost your savings even further.
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