Should You Make Catch-Up Contributions?

Workplace retirement plans, such as 401(k)s, as well as individual retirement accounts (IRAs), can allow account owners aged 50 and older to contribute more money than younger participants. The extra allowance is known as a catch-up contribution.

As the name implies, catch-up contributions are intended to help pre-retirees who may have fallen behind on retirement savings “catch up” and accelerate the growth of their retirement nest egg. However, as we’ll see, they can be a valuable tool for many retirement savers – even those who don’t really need to catch up.

Employer-sponsored retirement plans are not required to allow catch-up contributions, although most do. According to Vanguard, 98% of employer-sponsored retirement plans have this feature.¹

It’s also worth noting that the age threshold refers to account owners who are 50 or older at the end of the year. In other words, if you are turning 50 in December 2023, you can make a catch-up contribution to your retirement account for the 2023 contribution year.

If you have a 401(k), 403(b), SARSEP, or 457(b) retirement plan, the catch-up contribution limit is $7,500 for 2023, and is adjusted for inflation annually as needed. Since the annual contribution limit for these account types for 2023 is $22,500, this means that if you’re 50 or older, you can set aside as much as $30,000 in your workplace retirement plan. If you have a 403(b) plan, there’s an additional catch-up contribution of up to $3,000 allowed for employees with at least 15 years of service with the same employer.^{2, 3} 

If you have a traditional or Roth IRA, the standard contribution limit in 2023 is $6,500. The IRS allows a catch-up contribution of $1,000, bringing the overall limit for those 50 or older to $7,500.⁴

Big changes are coming soon

Thanks to the SECURE Act 2.0, which passed earlier this year, there are two major changes coming to catch-up contributions.

First, individuals ages 60 through 63 will be able to make even higher catch-up contributions starting in 2025. For this group, the catch-up limit to workplace retirement plans is rising to $10,000, and will be indexed for inflation going forward.⁵

Second, starting in 2026, high earners will only be able to make catch-up contributions to Roth accounts – which most 401(k) and similar plans offer). If your earnings for Social Security purposes were more than $145,000 for the previous calendar year, this restriction will prevent you from making pre-tax catch-up contributions, although your ability to contribute up to the standard 401(k) limit will be unaffected.⁶

It's also worth noting that this change could be one of many that takes place in 2026. Most of the changes made by the Tax Cuts and Jobs Act (aka the "Trump Tax Cuts") in 2018 are scheduled to sunset after the 2025 tax year.

Reasons to make catch-up contributions (even if you’re caught up)

As mentioned, catch-up contributions can be excellent financial tools for investors who need to, well, catch up. However, they can also be a useful even if you already are on track to have a financially comfortable retirement. A few things to keep in mind:

• Tax benefits: Perhaps the most obvious reason to take advantage of catch-up contributions, especially for high earners, is because it allows you to lower your tax bill right away. If you’re in the 35% or 37% tax bracket, maxing out the catch-up contribution allowance on your 401(k) could lower your federal tax bill by over $2,600 this year, compared to making the standard maximum 401(k) contribution. And that doesn’t even consider any state or local tax savings.
  
  To be sure, any money you eventually withdraw from pre-tax accounts in retirement will be considered taxable income at that time. However, if you anticipate being in a lower tax bracket in retirement than you are now, lowering your tax burden as much as possible while you’re still working makes good financial sense.
• Can diversify retirement savings: You can use catch-up contributions to diversify some of your retirement savings. If your plan offers a Roth option, you can make your standard 401(k) contribution on a pre-tax basis, and designate your catch-up contribution as Roth. If you start doing this with catch-up contributions several years before you retire, you could build up a significant balance in Roth accounts that you can withdraw from tax-free.
  
  Creating optionality in retirement can be a smart strategy. For example, if you receive a windfall of taxable cash one year in retirement – say, from the sale of a profitable investment outside of retirement accounts – you could possibly choose to use your Roth 401(k) instead of your traditional retirement savings to help control your tax liability.
• More cushion in retirement: Even if you are on track to have enough retirement savings, there’s no harm in giving yourself some extra financial security. And you might be surprised by the potential impact of taking full advantage of catch-up contributions.
  
  Consider this example. Assuming 7% annualized investment returns, someone who saves an extra $7,500 in their retirement account every year from age 50 through age 65 would have an additional $202,000 for their retirement.⁷
• Tax-advantaged estate planning: Retirement accounts like 401(k)s and IRAs can be valuable tools in estate planning. For one thing, they can easily bypass probate and will directly pass to your named beneficiaries. And while pre-tax retirement accounts become taxable income to your heirs, they can take their time withdrawing the money. If your spouse inherits your IRA or 401(k), they can simply treat it as their own retirement account. And if your children or other heirs inherit your IRA or 401(k), they can typically spread withdrawals over a 10-year period.
  
  Plus, thanks to a tax provision known as the Income in Respect of a Decedent (IRD) deduction, heirs can get an estate tax deduction for any pre-tax assets you pass to them. This is done to prevent the double taxation of assets, since tax is already paid on traditional IRA and 401(k) withdrawals. In other words, if you leave a $1 million IRA as part of a taxable estate, any estate taxes paid on this portion of your assets will give your heirs a tax deduction when they withdraw the money.⁸

When you shouldn’t make catch-up contributions

To be perfectly clear, catch-up contributions are not right for everyone, just like most personal finance decisions.

Most obviously, we believe you shouldn’t make catch-up contributions if you need (or may need) the money to cover your living expenses. And if you have other near-term savings goals, like paying for college or home repairs, it’s generally better to set aside money for those outside of your retirement accounts.

Even if you can afford to max out your catch-up contributions, it may not be the best use of your money if your tax situation isn’t bad right now. For example, if you have tax deductions and credits this year that make your effective tax rate very low as-is, and you are already on track to have enough retirement savings, it might not make sense to contribute more to your retirement accounts.

The bottom line on catch-up contributions

Catch-up contributions are best thought of as a financial tool that can help your tax and estate planning, not just as a provision for those who haven’t saved enough for retirement. By taking advantage, you could lower your tax bills (both now and in the future), and even save your heirs money in the long run.