A recent survey found that 18% of workers are very confident about having enough money to live comfortably in retirement. At the same time, 36% are not confident.1

In 2001 congress passed a law that can help older workers make up for lost time. But few may understand how this generous offer can add up over time.2

The “catch-up” provision allows workers who are over age 50 to make contributions to their qualified retirement plans. Moreover, these contributions are in excess of the limits imposed on younger workers.

How It Works

Contributions to a traditional 401(k) plan are limited to $23,000 in 2024. Those who are over age 50 – or who reach age 50 before the end of the year – may be eligible to set aside up to $30,500 in 2024.3

Additionally, setting aside an extra $7,500 each year into a tax-deferred retirement account has the potential to make a big difference in the eventual balance of the account, and by extension, in the eventual income the account may generate. (See accompanying chart.)

Catch-Up Contributions and the Bottom Line

This chart traces the hypothetical balances of two 401(k) plans. The blue line traces a 401(k) account into which $22,500 annual contributions are made each year. The red line traces a 401(k) account into which an additional $7,500 in contributions are made each year, for a total of $30,500 in contributions a year.

Upon reaching retirement at age 67, both accounts begin making withdrawals of $7,000 a month.

Without catch-up contributions, this hypothetical account will be exhausted before the account owner reaches age 80. If this saver were to take advantage of the allowed catch-up contributions, they could extend their account by as much as 6 years.

This hypothetical example is used for comparison purposes and is not intended to represent the past or future performance of any investment. Fees and other expenses were not considered in the illustration. Actual returns may vary. Both accounts assume an annual rate of return of 5%. The rate of return on investments will vary over time, particularly for longer-term investments.

In most circumstances, you must begin taking required minimum distributions from your 401(k) or other defined contribution plan in the year you turn 73. Withdrawals from your 401(k) or other defined contribution plans are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty.

At The End of The Day

By creating a plan, you are investing in your future self and increasing the likelihood of reaching your long-term goals. Therefore, knowing how to prioritize your spending and create a savings plan for your next big adventure will help make those moments more memorable and less stressful.

Want to learn more about saving for retirement? Check out our OnDemand retirement webinars.

Investment advice offered through OneDigital Investment Advisors LLC. The materials and the information provided are not designed or intended to be applicable to any person’s individual circumstances. All included information and data are limited only to the inputs and other financial assumptions indicated.

1. EBRI.org, 2023
2. Economic Growth and Tax Relief Act of 2001
3. IRS.gov, 2024. Catch-up contributions also are allowed for 403(b) and 457 plans. Distributions from 401(k) plans and most other employer-sponsored retirement plans are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. In most circumstances, you must begin taking required minimum distributions from your 401(k) or other defined contribution plan in the year you turn 73.