Catch-up contributions are a great way for older workers to add extra money to their retirement accounts, helping them increase their savings at a critical time. After years of paying for children, a house and other vital expenses, catch-up contributions allow older workers to get back on track in building their nest egg.

Here’s how catch-up contributions work and how they can help you build a better retirement.

What are catch-up contributions and who can make them?

Catch-up contributions allow workers with employer-sponsored retirement plans such as a 401(k) or 403(b) to add extra money to their accounts. The catch? You have to be at least 50 years old to make them, meaning you have limited time to do so before you retire.

The 401(k) contribution limit for 2022 is $20,500, and the catch-up contribution allows workers to add an additional $6,500 –  for a grand total of $27,000 each year.

That’s a lot of money, and this amount could be difficult to save, since it represents more than 25 percent of the annual salary for a worker earning $100,000 per year and, obviously, a much larger percentage for those earning less.

Fortunately, almost all employers offer catch-up provisions in their retirement plans, so most workers have the opportunity to make these contributions. Vanguard’s 2021 How America Saves report found that in 2020 a whopping 97 percent of plans offer catch-up contributions. However, only 15 percent of all participants used this enhanced savings opportunity, a percentage that has remained relatively unchanged since 2016. Not surprisingly, this percentage was significantly higher for higher wage earners – 58 percent of participants with an income of more than $150,000 made catch-up contributions in 2020.

It’s worth noting that IRAs also allow those age 50 and over to add an extra $1,000 each year on top of the regular contribution limit.

For workers who can take advantage of the catch-up provision based on their age and income, it may make sense to do so, even if it means revising family budgets, foregoing extra vacations or splurge purchases in exchange for the opportunity to enhance your future financial position.

Top reasons to take advantage of catch-up contributions

  1. Catch-up deductions can be made pre-tax, which has the effect of reducing taxable income, perhaps significantly, depending on your tax bracket. If you make catch-up contributions on a pre-tax basis, Income tax will not be due on that money until it is withdrawn from your 401(k) in retirement – at which point you may be in a lower tax bracket.
  2. While an exact prediction of how much the extra contributions from age 50 to 65 could add to your retirement nest egg is not possible, especially during times of market volatility, the compounding effect on fifteen years of catch-up contributions of $100,000 can help to close the gap between projected expenses and projected cash flow during a typical 20- to 25-year retirement.
  3. Catch-up contributions are made automatically through elective salary deferrals just like regular 401(k) deferrals.
  4. Catch-up contributions can also be made to Roth 401(k)s or split between traditional and Roth 401(k) accounts. While your tax break is not immediate with a Roth 401(k), you are eligible to make tax-free withdrawals in retirement.
  5. Catch-up contributions are crucial if you are just starting to prepare for retirement in your fifties or if you need to rebuild your retirement savings for any reason.
  6. You can begin your catch-up contributions in the calendar year you turn 50 –  you do not have to wait until your birthday.
  7. Your catch-up contributions may be eligible for an employer match. Check with your human resources department for the specifics of your plan.
  8. Catch-up contributions are considered part of your available balance when requesting a loan or hardship withdrawal from your 401(k).
  9. If you are on track with your retirement goals, taking advantage of the catch-up provision can help you exceed your goals, allowing you to comfortably take that extra vacation or splurge on a big purchase.

The future of catch-up contributions

Those who are focused on saving for retirement should keep an eye on future developments that may affect their ability to sock away even more.

Congress is currently considering two separate bills that may bring changes to the system.- One bill would increase the annual catch-up limit for workers aged 62-64 while making contributions after-tax only. The other version would increase limits for workers 60 and older but would not change the tax treatment of these contributions.

Whether or not these changes become law, there is no time like the present to consider maximizing your 401(k) contributions and the catch-up provision if you are financially able to do so.

Bottom line

Catch-up contributions can offer a great ability for older workers to add extra money to their retirement accounts, whether they’ve saved throughout their working life or really do need to catch up. With older Americans living longer than ever before, it’s valuable to ensure that you’ve built up all the wealth you need for potentially decades in retirement.