401(k) plan 2023: How to use catch-up contributions to increase your savings

You are able to increase your 401(k) plan contributions once you turn 50. The tax deduction you are eligible to claim for your catch-up contributions might result in a more than $1,000 annual tax bill reduction. Here’s how to benefit from catch-up contributions to your 401(k):

The 2023 cap on 401(k) catch-up contributions

In 2023, employees can postpone paying income tax on up to $22,500 in contributions to 401(k), 403(b), and the federal government’s Thrift Savings Plan. You can temporarily defer $30,000 in income taxes by making additional catch-up contributions to your 401(k) plan once you reach 50, up to a maximum of $7,500.

The Catch-Up Contribution Age for 401(k)s

Workers 50 years of age and older can increase their retirement savings in a 401(k) plan with catch-up contributions. Even if you haven’t turned 50 yet, you can make catch-up contributions at any time during the year in which you will turn 50.

The Tax Advantage of a Catch-Up 401(k) Contribution

Making catch-up contributions can have significant tax benefits. A worker over 50 in the 35% tax bracket can save an additional $2,625 in taxes by contributing the whole $30,000 to a 401(k), which will lower his overall tax liability by $10,500.

Contributing the same amount, a worker in the 24% tax bracket would save $7,200 in taxes, $1,800 more than younger workers. The money in your 401(k) plan won’t be subject to income tax until it is withdrawn. Additionally, you will pay the lower rate on 401(k) withdrawals if your tax bracket decreases after you retire.

How to Contribute to a Catch-Up Fund

If you’re 50 or older in 2023, you can make a catch-up contribution by depositing between $22,500 and $30,000 into your 401(k). The majority of 401(k) contributions come directly out of an employee’s paycheck. A worker 50 years of age or older would need to make contributions of $2,500 each month, or $1,250 per twice-monthly salary, in order to fully benefit from a 401(k) plan.

It can be challenging for many older workers to save $30,000 in a 401(k) plan. To fully benefit from catch-up contributions, a worker making $100,000 would need to set aside 30% of their income. And in order to receive the biggest tax savings possible, a person making $50,000 would need to put more than half of his income into a 401(k).

Catch-Up Roth 401(k) Contributions

To Roth 401(k)s, catch-up payments are also permitted. Although you won’t receive a tax advantage right away on the money you contribute to a Roth 401(k), you can position yourself for tax-free withdrawals in retirement and won’t have to pay income tax on the account’s investment gains.

Read More: 401(k) plan 2023: How to use catch-up contributions to increase your savings

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