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Here’s How Catch-Up Contributions Can Grow Your 401(k) Over Time

SmartAsset: Here's How Catch-Up Contributions Can Grow Your 401(k) Over Time

Catch-up contributions were first introduced in 2002 as a way for people to save more money for retirement starting at age 50. While the government initially permitted savers to contribute an extra $1,000 to their 401(k), the limits on catch-up contributions have gradually increased in the years since. In 2022, savers can contribute an extra $6,500 to their 401(k) after turning 50. But only 15% of all people eligible for 401(k) catch-up contributions take advantage of them.

We spend decades building up our retirement savings with regular contributions, so how much of an impact can catch-up contributions actually have on a person’s retirement savings? We ran the numbers to find out.

For more information on whether you should be making 401(k) catch-up contributions and insight to the impact they can have on your retirement, talk to a financial advisor.

Our Analysis

We set up three hypothetical scenarios involving Sharon, a 50-year-old investor with $250,000 in a 401(k) at the beginning of 2009. For each scenario, we assumed the money was invested in the Vanguard Target Retirement 2020 Fund (VTWNX).

We examined three scenarios, calculating how much Sharon would have by the end of 2020 if she…
1) Did not make any additional contributions to her 401(k) starting in 2009
2) Contributed the “regular” maximum every year over this time period.
3) Contributed the full maximum, making 11 years’ worth of catch-up contributions.

It’s important to note that 401(k) contribution limits, as well as catch-up limits, have changed over the years. Our analysis takes these changes into account. During the first year of our analysis, retirement savers could contribute $16,500 to a 401(k), plus an extra $5,500 in catch-up contributions if they were 50. By 2020, the cap on regular 401(k) contributions reached $19,500, while catch-up contributions had risen to $6,500.

Lastly, it’s worth pointing out that our analysis does not include 2008, the year in which the S&P 500 fell by more than 38% during the global financial crisis. Sharon would have presumably benefited from the 11-year bull market that began in 2009 and continued into 2020.

Three Retirement Scenarios

SmartAsset: Here's How Catch-Up Contributions Can Grow Your 401(k) Over Time

Scenario 1: No 401(k) Contributions

In our first scenario, Sharon would have stopped contributing to her 401(k) at age 50. However, her savings would have still grown exponentially over the following 11 years thanks to the post-financial-crisis bull market. By the end of 2020, the money Sharon had in the Vanguard Target Retirement 2020 Fund would have grown to $795,923. That means her initial 401(k) balance would have tripled in the 11 years since 2009, despite her not making additional contributions to her account.

Scenario 2: Maxed Out 401(k)

If Sharon had decided to max out her 401(k) starting in 2009, her savings would have grown at an even faster clip over the next 11 years. She would have made the maximum contribution allowable ($16,500) between 2009 and 2011, followed by $17,000 in 2012 and $17,500 in both 2013 and 2014. The contribution limit rose to $18,000 in 2015 before climbing to $18,500 in 2018, $19,000 in 2019 and $19,500 in 2020.

During those years, Sharon would have contributed $212,500 to her 401(k), which would be worth over $1.1 million by the end of 2020. Sharon would have nearly $360,000 more in her 401(k) compared to the first scenario, including an extra $144,648 in investment gains that she would have missed out on had she stopped contributing to her account in 2009.

Scenario 3: 401(k) Max Plus Catch-Up Contributions

If Sharon instead opted to make catch-up contributions starting at age 50 in addition to maxing out her 401(k), her savings would balloon to nearly $1.3 million by the end of 2020.

Between 2009 and 2014, she was able to save an extra $5,500 per year in her 401(k). The catch-up contribution limit rose to $6,000 between 2015 and 2019, before increasing to $6,500 in 2020. All told, Sharon would have made $69,500 in catch-up contributions between 2009 and 2020, in addition to the $212,500 in regular contributions.

In total, her 401(k) would have been worth $1,270,077 by the end of 2020. The catch-up contributions would have generated $47,506 in investment gains that Sharon would have missed out on in our second scenario. The chart below shows all three scenarios.

IRA Catch-up Contributions

SmartAsset: Here's How Catch-Up Contributions Can Grow Your 401(k) Over Time

The IRS also allows savers 50 and older to make catch-up contributions to their individual retirement account (IRA). However, these added savings are only $1,000 each year. As a result, the most a person 50 and older could contribute to an IRA was $6,000 between 2009 and 2012; $6,500 between 2013 and 2018; and $7,000 between 2019 and 2020.

Bottom Line

For most people, having enough money saved for retirement requires consistently contributing to a 401(k) or similar savings vehicle over the course of your career, as it can take decades to sock away enough money to live the life you want in retirement. The good news is the government permits people to make additional contributions to their 401(k) or IRA once they turn 50.

Our analysis illustrates the long-term impact that catch-up contributions can have on a retirement nest egg. Maxing out her 401(k) with catch-up contributions between 2009 and 2020 would allow our hypothetical investor, Sharon, to grow her retirement savings to $1,270,077 compared to $795,923 had she simply stopped contributing to her account in 2009.

Tips to Help You Save for Retirement

  • Get a financial advisor. A fiduciary financial advisor can help you plan and save for retirement, as well as create a withdrawal strategy for when it comes time to live off your hard-earned savings. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Use a taxable investment account. Don't overlook the benefits of investing with a taxable account, says Evon Mendrin, a certified financial planner and founder of Optometry Wealth Advisors in Madera, California. "Taxable investment accounts are underrated. Yes, the income from investments are taxable each year, but it's possible to invest quite tax-efficiently," he said. "There's full flexibility with accessing the accounts, no limits to how much you can invest, and the accounts are taxed differently than retirement accounts."
  • Track your progress. Knowing where you stand and how your savings are projected to grow in the long run can help you plan for effectively for retirement. SmartAsset's retirement calculator can help you estimate how much your savings will be worth when you retire.
  • Consider a backdoor Roth IRA. Roth IRAs can be valuable tools for retirement planning, because they are funded with after-tax dollars that grow tax free. However, if you file you're single and earn more than $144,000 in 2022, you're ineligible to contribute to a Roth IRA. Married couples who file their taxes jointly can't contribute to one if their combined adjusted gross income exceeds $214,000. If this applies to you, you may want to consider a backdoor Roth IRA, a strategy by which you convert a traditional IRA into a Roth version. While you'll need to pay income taxes on the money in the year you complete the conversion, the money can eventually be withdrawn tax free. Roth IRAs also are not subject to required minimum distributions (RMDs), which is an added bonus.

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