What is a Catch-Up Contribution?

A catch-up contribution is retirement savings contribution approved and regulated by the Internal Revenue Service (IRS). This retirement savings contribution is designed for individuals who are at least 50 years of age and have a 401(k) account, traditional IRA or Roth IRA. The 2001 Economic Growth and Tax Relief Reconciliation Act (EGTRRA) established the catch-up contribution. The purpose of this contribution is to allow people who are already 50 years save enough money for retirement.

When is a Catch-Up Contribution Allowed?

As the name implies, catch-up contributions allow people who have not saved enough for retirement catch-up on their retirement savings. People need to set aside some part of their earnings for life after work. Catch-Up contributions are regulated by the IRS, there is a limit to how much individuals can contribute each year. Catch-up contribution serves as an additional savings for people who have traditional IRA or Roth IRA. As created by EGTRRA in 2001, the catch-up contribution was designed to last till 2011, it was later made permanent in 2006 by the Pension Protection Act. The IRS stipulates certain eligibility requirements for catch-up contributions as well as the limit to the savings individuals can make.

Catch-Up Contributions and General Mechanics of Retirement Plans

There are several retirement plans or accounts that the IRS offers as a way of providing relief for workers when they retired. Retirement plans are usually tax-favored, including the ones that are sponsored by employees. Not all employees make catch-up contributions, employees who have started making retirement contributions early enough may not need these contributions. The IRS offers a catch-up contribution as a retirement saving contribution in addition to 401(k) plans, traditional IRA or Roth IRA. According to a survey conducted in 2017, there are millions of active participants of catch-up contributions.