When is the Right Time to Make Catch-Up Contributions

To truly succeed at saving for their golden years, most people should try to max out before-tax contributions to employer-sponsored retirement plans such as 401(k)s, 403(b)s, 457s and SIMPLEs, as well as to self-owned self-administered plans that include traditional and Roth IRAs. One way to do so: If you’re age 50 or older at the end of this year, you’re generally eligible to make “catch-up” contributions for the current tax year.

You also have until the due date of last year’s tax return (or, if it falls on a weekend, the next business day) to make IRA catch-up contributions for that year.

Above and Beyond

Catch-up contributions are above and beyond the regular contribution limits that apply to salary reduction plans and IRAs.

2024 Contribution Limits

Traditional and Roth IRAs – $7,000 (up from $6,500 in 2023)

401(k), SARSEP, 403(b) Plan Deferrals & 457 Plan deferrals

Click here to learn the maximum contribution amount allowed for this year, as well as the “catch-up” contribution amount for those over age 50.

SIMPLE deferrals – $16,000 (up from $15,500 in 2023)

Why should you make catch-up contributions? Because studies show that many Americans haven’t been saving enough for retirement. This shortfall becomes more critical as retirement age approaches. Extra contributions are intended as a tax incentive to spur people to make up the difference while they can.

This Year’s Amounts

Here’s a table of the catch-up contributions currently scheduled:

Tax Year  2024

401(k), 403(b) and 457 plans *    $7,500 (unchanged from 2023)

Traditional and Roth IRAs**       $1,000

SIMPLE deferrals                         $3,500 (unchanged from 2023)

* Note: Depending on your salary level and terms of your employer’s plan, your personal maximum contributions may be less.

** If you are married, and both you and your spouse are age 50 or older, you can each generally contribute the listed amounts to your separate IRAs.

How Much of a Difference Can Catch-Up Contributions Really Make?

Good question. To see the change over time, let’s assume that back in 2005, you turned 50. At that time, the limits for employer-sponsored salary reduction 401(k), 403(b), or 457 plans were $14,000 and $4,000 for catch-up contributions. And let’s assume that you have taken full advantage of the maximum contributions allowed for 2005 and the following 15 years. The analysis below shows how much extra you could’ve accumulated when you reached age 65 in 2020:

At 5% Return – $116,624

At 7% Return – $137,454

At 9% Return – $162,686

Note: These are before-tax numbers

The next analysis shows how much extra you could’ve accumulated in your IRA by age 65, assuming you turned 50 in 2005 and make maximum catch-up contributions starting with the 2005 tax year (when the limits were $4,000 plus $500 catch-up) and continuing for the following 15 years:

At 5% Return – $21,729

At 7% Return – $25,406

At 9% Return – $29,825

Again, these are before-tax numbers

The final analysis shows how much extra you could accumulate by making salary deferral catch-up contributions plus IRA catch-up contributions, assuming you turned 50 in 2005 and make maximum catch-up contributions starting with the 2005 tax year and continuing for the subsequent 15 years:

At 5% Return – $138,353

At 7% Return – $162,860

At 9% Return – $192,511

Once again, these are before-tax numbers

Anyway you look at it, that’s a lot of extra money. If you’re married, your spouse can make catch-up contributions (if eligible) and double these amounts.

Copyright 2024

This article appeared in Walz Group’s May 13, 2024 issue of The Bottom Line e-newsletter, produced by TopLine Content Marketing. This content is for informational purposes only.