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 401(k) accounts and individual retirement accounts (IRAs). When a catch-up contribution is made, the total contribution will be larger than the standard contribution limit.

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) created the catch-up contribution provision, thus allowing older workers to set aside more earnings for retirement.

Key Takeaways

  • Catch-ups are permitted for workers aged 50 years and older.
  • For 2020 and 2021, these workers can contribute an additional $1,000 to an IRA, on top of the standard $6,000 contribution limit.
  • For 401(k) participants, the catch-up contribution limit is $6,500 for 2020 and 2021, on top of the standard $19,500 contribution limit.

How Catch-Up Contributions Work

Originally, catch-up contributions under EGTRRA were scheduled to expire at the end of 2010. However, the Pension Protection Act of 2006 made catch-up contributions and other pension-related provisions permanent.

  • For 2020 and 2021, the limit on annual contributions to an IRA is $6,000 a year, while the catch-up contribution limit for workers 50 and over remains at $1,000.
  • For workers 50 and over who participate in a 401(k), 403(b), most 457 plans, or the federal government's Thrift Savings Plan, the catch-up rate is $6,500 for 2020 and 2021. Contributions are limited to $19,500.
  • For SIMPLE 401(k) plans, the catch-up contribution is $3,000 for 2020. 

$6.3 trillion

How much workers had saved in 401(k) plans as of March 2020.

Catch-Up Contributions and General Mechanics of Retirement Plans

Workers can make catch-up contributions to a variety of retirement plans, including the popular employee-sponsored 401(k). Those who do not have an employee-sponsored plan can contribute to a traditional IRA or Roth IRA. Other options include the SIMPLE IRA and Simplified Employee Pension (SEP). It's important to have one of these retirement plans and begin contributing early so there is no need to make catch-up contributions later in life.

More than 58 million active 401(k) participants held $6.3 trillion in retirement assets as of June 2020, according to the Investment Company Institute. Historically, 401(k) plans have been criticized for their high fees and limited options. However, reforms in recent years have 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 employee preference. Many fund expenses and management fees have remained level or even declined, making the 401(k) option feasible for more workers. A 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 road), a Roth 401(k) is another type of employer-sponsored retirement account that is funded with after-tax money. The Roth 401(k) has several advantages, depending on your tax situation at retirement and other factors.