DEFINITION of 'Catch-Up Contribution'

A catch-up contribution is a type of retirement savings contribution that allows people over 50 to make additional contributions to their 401(k) accounts and/or individual retirement accounts (IRAs). 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.

BREAKING DOWN 'Catch-Up Contribution'

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 2018, the IRS limit on annual contributions to an IRA remains at $5,500, while the catch-up contribution limit for individuals aged 50 and over is $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 $6,000.

Catch Up Contribution 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). For those who do not have employee sponsorship, they 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 December 2017, there were 55 million active participants in 401(k) plans with total holdings of $5.3 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 and/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.

RELATED TERMS
  1. Additional Voluntary Contribution ...

    An additional voluntary contribution is an extra allocation of ...
  2. Independent 401(k)

    An Independent 401(k) is a 401(k) plan set up for an individual ...
  3. Roth Option

    A Roth Option available within some employer-sponsored qualified ...
  4. Pretax Contribution

    A pre-tax contribution is any contribution made to a designated ...
  5. 403(b) Plan

    A 403(b) is a retirement plan for certain employees of public ...
  6. SIMPLE IRA

    A SIMPLE IRA is a retirement savings plan that can be used by ...
Related Articles
  1. Retirement

    5 Reasons You Should Take Advantage of 401(k) Catch-ups

    Most Americans don't have a enough saved for retirement, but when they turn 50, they have a second chance thanks to the 401(k) catch-up provision.
  2. Financial Advisor

    457 Plan Contribution Limits in 2016

    Learn about the 2016 contribution limits for 457(b) retirement plans and how you may be eligible to make catch-up contributions up to twice the annual limit.
  3. Retirement

    How to Save More for Your Retirement

    Be sure you know all the tax-advantaged ways in which you can save more for retirement.
  4. Retirement

    New Retirement Plan Limits for 2016

    Here's what the limits look like for 2016, compared to 2015 (the taxes you'll file in April).
  5. Financial Advisor

    457 plans versus 403(b) plans: A comparison

    There's plenty of advice about 401(k) plans, but what about 457 and 403(b) plans? Find out what these plans are about and the differences between them.
  6. Retirement

    Retirement Savings Tools I: Employer Savings Plans

    There are a variety of employer savings plans that can offer multiple routes to saving for retirement.
  7. Investing

    No 401(k) Boost in 2017 – Again

    We didn’t get a raise in 401(k) contributions in 2015 or 2016. Now it’s happened again. Why?
  8. Retirement

    How Can You Make the Most of Your 401(k)?

    Make the most of your 401(k) plan by contributing early and taking advantage of employer matches.
  9. Retirement

    IRA Contribution Limits in 2018

    Find out about the 2018 (and 2017) limits for contributions and income thresholds for individual retirement accounts, including traditional IRAs and Roth IRAs.
RELATED FAQS
  1. What is the catch-up contribution limit for qualified deferred tax plans?

    Learn about statutory limits established by the U.S. Internal Revenue Service for catch-up contributions to deferred retirement ... Read Answer >>
  2. Are catch-up contributions tax deductible?

    Learn the federal tax rules for contributions to 401(k), 403(b), SIMPLE 401(k) and IRA retirement plans before and after ... Read Answer >>
  3. How old do I have to be to make catch-up contributions?

    Learn about the rules and limitations for catch-up contributions for common retirement plans, such as 401(k), 403(b), IRAs ... Read Answer >>
  4. Can catch-up contributions be matched?

    Learn about how the specific terms of your retirement savings plan dictate how and when your employer may match your catch-up ... Read Answer >>
  5. Are catch-up contributions allowed for SEP IRAs?

    Find out whether you can make catch-up contributions to your SEP IRA, including the basics of how SEPs work and how contributions ... Read Answer >>
Hot Definitions
  1. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  2. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  3. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  4. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  5. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  6. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
Trading Center