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What are Catch-up Contributions and Should You Use Them?

March 4th, 2019 | Written by

catch-up contributionsFor those that got off to a slow start in saving for retirement, fortunately, most retirement plans allow you to catch up later. If you will be age 50 or older this year, you can save more in your 401(k) plan—up to $6,000 more in catch-up contributions. That’s on top of the $19,000 limit for savers who are under age 50, for a total of $25,000.

Catch-up contributions can help you have more retirement income

Do catch-up contributions make much of a difference? They can. Consider Tom and Mike, both age 50. Tom saves $19,000 a year in the plan. Mike decides to save $6,000 more in catch-up contributions, for a total of $25,000.

Catch-up Contributions

By age 65, Mike will have about $150,000 more than Tom, assuming that each earns a 6% average annual return[1]. That means Mike should have about $6,000 more each year in retirement income, assuming he withdraws 4% of his savings annually.

Catch-up contributions can help you save more for your retirement

When you contribute to your 401(k) plan, you have more in retirement savings and gain a tax advantage. Those benefits get larger with catch-up contributions. However, to obtain the tax benefits of catch-up contributions, you’ll need to increase your retirement plan savings rate. For example, Peggy will turn age 50 next year and decides to make catch-up contributions. To calculate her savings rate, she divides $25,000 by her salary of $150,000—the full savings amount allowed for people who are age 50 or older and are eligible to make catch-up contributions. Peggy sees she needs to save 16.67% of her pay starting in January. Currently Peggy contributes 12% of her pay to the plan so she will need to increase her savings rate by 4% at year-end.

You can use this online calculator to do the math for you! All you need to do is answer a few easy questions, including how much you make, how often you’re paid, and if you intend to make catch-up contributions. Do you have more questions? Send me a note below!

[1] This hypothetical example doesn’t represent the return on any particular investment. Your final account balance does not reflect any taxes or penalties you’ll pay when you withdraw money in retirement. The rate is not guaranteed.

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    This information is not intended to be used as the only bases for investment decisions, nor should it be constructed as advice designed to meet your particular needs. You are advised to seek the advice of your financial advisor prior to making any decision based on any specific information contained herein.
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