Catch-up contributions refer to the additional contribution that people age 50 or older are eligible to make each year on top of the annual contribution limit for 401(k) plans. The amount of the catch-up contribution varies from year to year with inflation. Despite the name, you can still make these extra 401(k) contributions even if you're ahead in your retirement savings, as long as you meet the age requirement.
Catch-up contributions to traditional 401(k) plans are treated the same way as other employee contributions to the plan: the money is not included in your taxable income for the year. For example, assume you are over 50, earn $122,500, the elective deferral limit is $17,000 and the catch-up limit is $5,500. If you contribute the full $22,500 -- the deferral limit plus the catch-up limit -- to the plan, your W-2 will only show $100,000 in taxable income in box 1 because the catch-up contribution is fully pretax.
Even if you are over 50, you can't make a catch-up contribution unless your compensation from the employer equals or exceeds your contribution amount. For example, if you work for a company and make only $15,000, even if the contribution limit is $17,000, and the catch-up contribution is an additional $5,500, you can't contribute more than $15,000. In addition, your 401(k) plan might not allow for catch-up contributions. If you try to contribute extra, it will be an impermissible excess contribution. The IRS penalizes excess contributions by including them in your taxable income in the year you make the contribution and taxing it a second time when you take a distribution.
If you work for multiple employers, the 401(k) contribution limit applies cumulatively to all of your contributions. For example, if your total contribution limit, including catch-up contributions, is $22,500 and you contribute $22,500 to your first employer's 401(k) plan, you can't contribute any more to your second employer's plan. However, having access to multiple plans does offer a benefit if neither plan allows for catch-up contributions. You can make contributions to each plan up to your total contribution limit, including catch-up contributions, and not exceed the limits for either plan. For example, assume that the 401(k) plans for both employers do not permit catch-up contributions. If your total contribution limit is $22,500, you can put $11,250 in each plan pretax so that you fully maximize your pretax contribution limit, without exceeding the limit for either plan.
If you make your catch-up contribution to a Roth 401(k) plan, it won't be pretax. Roth 401(k) plans offer after-tax savings, which means contributions are taxable income, but qualified distributions come out tax-free. If you anticipate paying a higher tax rate in the years in which you'll take distributions, a Roth 401(k), if it's available to you, may offer more significant tax benefits than the pretax contributions to a traditional 401(k) plan.
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