Nearing retirement? Catch-up contributions may be for you – The Business Times (2025)

Many people ask me, “how much should I have saved for retirement?” My response typically is:

How much do you have saved for retirement?

How much do you spend?

How long are you going to live?

A 2024 study by EBRI.org revealed 21 percent of employees feel highly confident about having sufficient funds to sustain a comfortable lifestyle throughout retirement. Meanwhile, 32 percent express a lack of confidence.

In 2001, Congress enacted legislation, the Economic Growth and Tax Relief Act of 2001, designed to assist older employees in compensating for lost savings time. However, few individuals fully grasp how this beneficial provision can accumulate over the years.

The “catch-up” rule enables workers over the age of 50 to contribute amounts beyond the standard limits imposed on younger employees in their qualified retirement plans.

How It Works

For 2025, according to IRS.gov, contributions to a standard 401(k) plan are capped at $23,500. However, individuals who are 50 or older – or will turn 50 before year-end – may qualify to contribute up to $31,000. Additionally, those aged 60 to 63 can make further contributions, reaching a total of $34,750.

Catch-up contributions are also permitted for 403(b) and 457 plans. Distributions from 401(k) accounts and most other employer-sponsored retirement plans are treated as ordinary income and, if taken before age 59 1/2, could be subject to a 10 percent federal penalty. Most individuals must begin minimum withdrawals from their 401(k) or similar plans the year they turn 73.

Catch-up contribution impact

Allocating an extra $7,500 annually into a tax-advantaged retirement account could significantly boost the final account balance and, consequently, the potential income it can generate. So, what is the difference in estimated growth of two 401(k) accounts with and without the “catch-up” contribution?

For example, let’s assume you start at age 50 and earn a 5 percent return annually. If you contribute $23,500 annually, your total at age 67 will be approximately $691,473. However, if the additional $7,500 is deposited each year, bringing total contributions to $31,000, the total would be approximately $912,156.

I think most people would agree that $220,683 could make a difference in their retirement lifestyle. Of course, this example is basic and for illustrative purposes only and does not guarantee past or future investment performance. Fees and other costs were not factored into this analysis, so actual returns will differ, but you get the point.

Also consider saving a portion of your contributions in a Roth 401(k), if available. You pay taxes on your designated Roth contributions. This means your gross income for the year you make designated Roth contributions will be higher than if you had made only pre-tax salary deferrals. Roth contributions, on the other hand, are not taxed when you withdraw them from the plan.

Earnings on Roth contributions are also not taxed when they are withdrawn from the plan if your withdrawal is a qualified distribution. A “qualified distribution” is a distribution that is made: at least 5 years after the first contribution to your Roth account; and after you’re age 59 1/2 or on account of you being disabled, or to your beneficiary after your death.

In general, you are required to begin taking minimum distributions from your 401(k) or other defined contribution plans the year you turn 73, or 75 if born 1960 or later. Withdrawals from a standard 401(k) or similar retirement plans are taxed as regular income, and distributions made before age 59 1/2 may incur a 10 percent federal tax penalty.

This information provided is not intended as tax or legal guidance.

Barbara Traylor Smith, CFP, ChFC, CLU, can be seen on KREX Saturdays at 6 p.m. and KJCT Sundays at 8 a.m. or heard on KNZZ Saturdays at 8 a.m. She has been featured in Bloomberg Business Week, Entrepreneur and Fortune magazines. Contact her at 970-256-1748 or retirementoutfittersllc.com. Investment advisory services offered through Foundations Investment Advisors LLC, an SEC registered investment adviser.