What They Are, And How To Use Them – Forbes Advisor – Earn Charter

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Many Americans don’t have enough money saved to retire comfortably. The U.S. Census Bureau reported that approximately 40% of households have no money at all in retirement accounts.

Of course, it can be difficult to save for retirement when you’re younger and struggling to keep up with childcare costs or paying off student loans. By the time you reach your 50s, you may find your balances are behind where you want them to be.

Luckily, there’s still hope to be able to retire. If you’re age 50 or older, you get to benefit from higher contribution limits to help your retirement accounts catch up. These 401(k) catch-up contributions can boost your savings substantially so you can still retire on time.

What Are 401(k) Catch-Up Contributions?

To incentivize adults nearing their retirement age to save additional money, the government allows those 50 and older to contribute a higher amount to their 401(k) plans through “catch-up contributions.” Taking advantage of 401(k) catch-up contributions will allow you to save thousands more for retirement each year.

A 401(k) plan is an employer-sponsored retirement plan with valuable tax benefits. It allows employees to contribute a portion of their pre-tax salary. That means a portion of your paycheck is contributed before taxes are taken out, reducing your taxable income.

Contributions to a 401(k) plan and the earnings on your investments are tax-deferred, so you only pay income taxes when you take withdrawals in retirement. Some employers also match your 401(k) contributions up to a percentage of your salary.

Because of the tax advantages 401(k) plans provide, the government does limit how much you can contribute to your plan through elective salary deferrals—which are contributions from your paycheck—and employer matching contributions.

401(k) Contribution Limits for 2024

For 2024, the maximum you can contribute from your paycheck to a 401(k) is $23,000. The limit for overall contributions—including the employer match—is 100% of your compensation or $69,000, whichever is less. However, if you are 50 or older, different limits apply.

Adults 50 and older can contribute an additional $7,500 to their 401(k) plans in 2024. In total, qualifying adults can save up to $30,500 per year. When also considering employer matching contributions, that means these catch-up contributions increase the overall maximum to $76,500.

You can use catch-up contributions if you turn 50 at any time during the calendar year. For example, even if you turn 50 on December 31, 2024, you can take advantage of the catch-up contribution limit during 2024.

SIMPLE 401(k) Limits

The above 401(k) contribution limits refer to traditional 401(k) and Roth 401(k) plans, the most common forms. If you have a SIMPLE 401(k), a retirement plan offered by small businesses, different limits apply.

For 2024, the maximum you can contribute to a SIMPLE 401(k) is $16,000. Those 50 or older can contribute an additional $3,500 per year in catch-up contributions, bringing the total maximum to $19,500 in employee contributions.

The Impact of 401(k) Catch-Up Contributions

How impactful catch-up contributions can be depends on your income and how much of your salary you can dedicate to saving for retirement.

Most people can only put a small percentage of their income—such as 5% to 15% of their earnings—toward retirement. Considering that the median household income was $69,021, that means most families would only be able to save between $6,902 and $10,354 per year, well below the maximum employee contribution limit before catch-up contributions kick in.

Catch-up contributions tend to benefit those with higher incomes or lower expenses who can dedicate larger sums to their retirement fund. If you do have the money available to take advantage of catch-up contributions, it can have a significant impact on your 401(k) balance.

Consider this example: Jerry is 50 years old and has $100,000 in his retirement fund. If he breaks the general contribution maximum of $23,000 into monthly contributions of $1,916.67 and earns an 8% annual return, he’ll have $1.22 million by the time he retires at the age of 67.

But let’s say Jerry has some wiggle room in his budget, so he takes advantage of catch-up contributions. The overall maximum limit with catch-up contributions is $30,500, or $2,541.67 per month. If Jerry contributes that amount every month and earns an 8% annual return, he’ll have approximately $1.49 million by the age of 67—$271,464 more than if he hadn’t taken advantage of catch-up contributions.

Using a 401(k) calculator can help you see how contributing more to your own 401(k) might affect your nest egg in retirement.

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401(k) Catch-Up Contribution FAQs

Do employers match 401(k) catch-up contributions?

Whether an employer matches catch-up contributions varies by your company’s policies. Some companies will match some or all of your additional contributions, while some will exclude catch-up contributions from the employer match program.

Is there a limit to how many years I can make catch-up contributions?

Once you are 50, you can take advantage of catch-up contributions as long as you are still employed and have an eligible 401(k) plan.

Can high earners take advantage of catch-up contributions?

Those with high incomes can use catch-up contributions to save more money. But under the SECURE Act 2.0, new rules may apply.

Under the new rules, those who make $145,000 or more will have to put their catch-up contributions into a Roth 401(k), so the contributions will be made with after-tax dollars. This change was originally supposed to go into effect in 2024, but it has been delayed until 2026.

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