How Catch-Up Contributions Can Bolster Retirement Savings

June 20, 2024

If you’re age 50 or older, you can make extra “catch-up” contributions to certain types of retirement accounts. Many people fail to capitalize on this opportunity because they haven’t looked at the significant impact these extra contributions can have on their retirement-age wealth.

If you’re worried that you won’t have enough money saved to be financially comfortable in retirement, your worry may be justified. As you’ll see, making catch-up contributions can help alleviate that concern. Here’s what you need to know about the catch-up contribution “fix.”

IRA Catch-Up Contributions 

Once you’ve reached age 50, you can make extra contributions of up to $1,000 annually to your traditional IRA or Roth IRA. You have until April 15, 2025, to get it done for your 2024 tax year. Contributions to deductible IRAs create tax savings, but your income may be too high to qualify.

Catch-up contributions to Roth IRAs don’t generate any upfront tax savings, but you can take federal-income-tax-free qualified withdrawals after age 59½ if you’ve had at least one Roth account open for more than five years. There are income restrictions on Roth contributions, too. Worst case: you can make nondeductible traditional IRA catch-up contributions and benefit from the account’s tax-deferred earnings advantage.

Company Plan Catch-Up Contributions 

For 2024, you can make salary-reduction contributions of up to $7,500 to your 401(k), 403(b) or 457 account, if:

1. The company plan allows them, and
2. You’ll be age 50 or older as of year end.

Salary reduction contributions are subtracted from your taxable wages, so you effectively get a federal income tax deduction. If your state has a personal income tax, you’ll generally also get a state income tax deduction.

You can use the resulting tax savings to help pay for part of your catch-up contribution, or you can set the tax savings aside in a taxable retirement savings account to further increase your retirement-age wealth.

Important: To be abundantly clear, the advantage of making these extra contributions is that they reduce your taxable salary while also allowing you to put more into your company plan retirement account for the future. That’s a tax-smart double play.

Designated Roth Account Catch-Up Contributions

Your company plan may offer the Designated Roth Account (DRA) option. Assuming the plan permits them, you can make catch-up contributions to your DRA. However, these contributions are after-tax, so they don’t reduce your taxable wages. On the plus side, DRA balances can grow federal-income-tax-free, and qualified distributions taken from DRAs are federal-income-tax-free. A qualified distribution is one that: (1) occurs at least five years after your first contribution to the DRA and (2) is made after reaching age 59½ or due to disability or death.

How Much Extra Could You Accumulate?

Making catch-up contributions can quickly add up, because the maximum amount is considerably higher today than it has been historically. For example, in 2002, the maximum catch-up contribution to a 401(k) account was only $1,000 versus $7,500 for 2024. The maximum catch-up contribution to an IRA was only $500 versus $1,000 for 2024.

Consider the following examples to understand how much additional retirement-age wealth you could accumulate by making catch-up contributions.

IRA catch-up contributions.

Suppose you’re age 50, and you contribute an extra $1,000 to your IRA this year and then do the same for the next 15 years, through age 65. Here’s how much extra you could have in your IRA by age 65 (rounded to the nearest $1,000):

4% Annual Return: $22,000

6% Annual Return: $26,000

8% Annual Return: $30,000

Making larger deductible contributions to a traditional IRA can also lower your tax bills if your income qualifies. Making additional contributions to a Roth IRA won’t affect your tax bill, but you can take more tax-free withdrawals later in life.

Company plan catch-up contributions.

Suppose you’ll turn 50 next year, and you contribute an extra $7,500 to your company plan for next year. Then you do the same for the following 15 years, through age 65. Here’s how much extra you could have by age 65 in your 401(k), 403(b) or 457 plan account or Designated Roth Account (DRA) (rounded to the nearest $1,000):

4% Annual Return: $164,000

6% Annual Return: $193,000

8% Annual Return: $227,000

Finally, if you’ll turn 50 next year, you could make the maximum catch-up contributions to both an IRA and a company plan for each year, through age 65. Here’s how much extra you’d have in your retirement savings by age 65 (rounded to the nearest $1,000):

4% Annual Return: $186,000

6% Annual Return: $218,000

8% Annual Return: $258,000

Conclusion

As you can see, making extra contributions can potentially add up to some big numbers by the time you reach retirement age. If your spouse can make catch-up contributions too, you can potentially double the amounts shown here. That’s certainly something to think about, especially if you have doubts about whether Social Security will be there for you when you need it. Contact your tax advisor or the GRF Tax Team if you have questions or want more information about retirement account catch-up contributions.