What Is a Catch-Up Contribution?

A catch-up contribution is a type of retirement savings contribution that allows people aged 50 or older to make additional contributions to their 401(k) accounts and/or individual retirement accounts (IRAs). Catch-up contributions will be larger than the standard contribution limit.

The catch-up contribution provision was created by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), so that older individuals would be able to set aside enough savings for retirement.

Key Takeaways

  • Catch-up contributions allow older retirement savers to contribute amounts in excess of the standard limit to their qualified retirement account.
  • For 2019 and 2020, the standard IRA contribution limit is $6,000 a year while the catch-up limit is $7,000.
  • Catch-ups are only allowable for workers aged 50 years and older.

How Catch-Up Contributions Work

Originally, the ability to make catch-up contributions under EGTRRA was set to end in 2011. However, the Pension Protection Act of 2006 made catch-up contributions and other pension-related provisions permanent.

Although using catch-up contributions is a great way for many people to expand their retirement savings, several studies show that few eligible candidates use catch-up contributions.

  • For 2019 and 2020 the IRS limit on annual contributions to an IRA is $6,000 a year, while the catch-up contribution limit for individuals aged 50 and over remains at $1,000.
  • For those employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, along with the federal government’s Thrift Savings Plan, this catch-up rate is $6,500 for 2020 ($6,000 for 2019). Contributions for these plans are limited to $19,500 for 2020 ($19,000 for 2019).
  • For SIMPLE 401(k) plans, the catch-up contribution remains is $3,000 for 2019 and 2020. 

In early January, 2020, President Trump signed the Setting Every Community Up for Retirement Enhancement (SECURE Act), which hope to improve retirement security for Americans. This act did not affect catch-up contribution amounts or provisions.

Catch-Up Contributions and General Mechanics of Retirement Plans

Individuals may make catch-up contributions in a variety of retirement plans including the popular employee-sponsored 401(k). Those who do not have employee sponsorship may set up and contribute to a traditional or Roth IRA. It’s important to have one of these retirement options (other options include the SIMPLE and SEP IRA plans) and to begin contributing early so that you do not need to make catch-up contributions later in life.

As of September 2019, according to the Investment Company Institute, there were 55 million active participants in 401(k) plans with total holdings of $5.9 trillion in assets. Historically, 401(k) plans have been criticized for their high fees and limited options; however, plan reform in recent years has benefited employees.

In addition to offering catch-up contributions, the average plan offers approximately two dozen different investment options that balance risk and reward, according to the employees’ preferences. Many fund expenses and management fees have remained level or even declined, making the 401(k) option feasible for more Americans. More widespread understanding of 401(k)s, through education and disclosure initiatives, will continue to boost participation.

While the 401(k) plan is funded with pre-tax dollars (resulting in a tax levy on withdrawals down the line), a Roth 401(k) is another type of employer-sponsored investment savings account that is funded with after-tax money. There are advantages to each of these plans, depending (among other things) on what you think your tax situation will be at retirement.