Catch-Up Contribution

Catch-Up Contribution refers to an additional, voluntary contribution that employees who are aged 50 or older can make to their employer-sponsored 401(k) retirement plans. The catch-up provision was introduced as part of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) to allow older workers to bolster their retirement savings, acknowledging the need to accelerate savings closer to retirement age.

In the context of an employer-sponsored 401(k) plan, eligible participants are usually allowed to contribute a certain percentage of their salary on a tax-deferred basis, subject to annual contribution limits set by the Internal Revenue Service (IRS). As of my last knowledge update in September 2021, the catch-up contribution limit for individuals aged 50 and above was $6,500 in addition to the regular contribution limit. This means that eligible participants in this age group could contribute up to the regular limit plus the catch-up amount.

Examples of Catch-Up Contributions:

• Suppose an employee aged 53 earns an annual salary of $75,000 and wishes to maximize their retirement savings. The regular contribution limit for 2021 was $19,500. With the catch-up provision, this employee can contribute an extra $6,500, totaling $26,000 for the year.

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• Another employee, aged 50, earns $100,000 per year and has a 401(k) plan with a generous employer match. The regular contribution limit would be $19,500, but with the catch-up contribution option, they can contribute $26,000, boosting their retirement nest egg significantly.

• A 58-year-old employee with an annual salary of $85,000 has not been able to save much for retirement due to financial constraints earlier in their career. Thanks to the catch-up provision, they can now contribute an additional $6,500 on top of the regular contribution limits, playing catch-up on their retirement savings.

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