You may have heard that it's never too early to save for retirement, and that may be true. When you start putting money into retirement plans and other investments as early as your 20s, the assets can build up over time. But not everyone has the ability to invest a significant amount in younger years, which is why catch-up contributions are allowed.

Discover more about catch-up contributions below, including how they work, when you can make them and how much you can contribute to these types of retirement plans every year.

What is a catch-up contribution?

The IRS caps how much you can put into tax-deferred retirement plans, such as 401(k) and IRA plans, every year. When you reach age 50, you can put a bit more into these plans each year if you want to. These extra amounts are known as catch-up contributions.

The reason catch-up contributions are allowed is so people who are getting close to retirement age can maximize savings for that purpose. You may not have saved as much as you would have liked over the years, or you might be facing new information — such as a medical diagnosis or a change in the economy — that alters your goals for retirement savings.

If you haven't done some retirement planning, now is the time. Whether you're 20-something or 50-something and looking at catch-up contributions, you can use a retirement calculator to figure out how much you may need to save to fund your lifestyle in later years.

How do catch-up contributions work?

Catch-up contributions are something you do when you're still working and preparing for an upcoming retirement. You can start making these contributions at age 50, which gives you 12 years of catch-up contributions if you decide to retire early at 62. It gives you 15 to 20 years of catch-up payments if you decide to retire between the ages of 65 and 70.

You can make catch-up contributions in the same way you would make other contributions to retirement plans. If you're contributing to an employer-sponsored plan, you would do so with elective contributions taken out of your paycheck. Talk to your human resources or compensation departments about increasing your contributions. You might also want to consider how much your employer will match, as you can increase your retirement savings significantly with an employer match.

If you're contributing to a Roth IRA or another type of self-funded retirement account, you typically fund the account with direct payments. This may be done by mailing a check or transferring money from an existing checking or savings account. In many cases, you can set up automatic transfers to fund your IRA or another retirement account with pre planned amounts each time you receive a paycheck. 

Catch-up contribution limits

You can't simply invest your entire salary into retirement funds to catch up in later years. Whether you're making 401(k) or Roth catch-up contributions, the IRS imposes limits on how much you can contribute while enjoying pre-tax benefits. Here's a quick breakdown of various types of retirement accounts and the maximum catch-up contributions you can make for 2022 and 2023.

• 401(k), 403(b), 457 and Thrift Savings Accounts: You can contribute $6,500 in catch-up contributions in 2022 and $7,500 in catch-up contributions in 2023.
• Traditional or Roth IRA: You can contribute $1,000 in catch-up contributions in 2022 and $1,500 in catch-up contributions in 2023.
• SIMPLE IRA: You can contribute $3,000 in catch-up contributions in 2022 and $3,500 in catch-up contributions in 2023.

As you can see, the maximum contribution amounts can change each year. Keeping up with these figures is important, as you may be able to contribute more to catch up your retirement savings with each passing year.

It's also important to note that these catch-up contributions are on top of regular contributions. The idea is to increase how much you can save overall. For example, in 2023, the regular contribution limit for 401(k), 403(b), 457 and Thrift Savings Plans is $22,500. If you add catch-up contribution limits, the total you can contribute to these plans is $30,000 for 2023. 

The advantage of catch-up contributions

The advantage of catch-up contributions is that you can increase how much you're saving for retirement as you get closer to that age. While you may accumulate more in the long run on investments that began in your 20s, it's not always possible to put money away when you're young. For many people, earnings increase over time, making it possible to save more in later years.

Having this flexibility also lets you make changes to your retirement plan if necessary. For example, you may realize you want to retire earlier than you originally planned and need to save more money now, so you can cover more years of retirement. Or, you might see changes in the economy that signal to you that things will be more expensive during retirement than you had planned for. Catch-up contributions let you invest more aggressively to cover these types of chances, especially when you can combine catch-up contributions with the benefits of 401(k) matching. 

How to start making catch-up contributions

The first step to making catch-up contributions is ensuring that your budget can cover them. Take some time to understand your monthly income and expenses. Do you have enough left over to maximize catch-up contributions? 

In 2023, for example, you can make up to $7,500 in catch-up contributions to a 401(k). That's only $625 per month. If you have that much disposable income, set aside around $300 from each paycheck to put toward catch-up contributions.

If your budget is a bit tighter, look at ways you can cut down on expenses. Can you cut out some discretionary spending, such as eating out, so you can put more toward retirement? Even if you can't max out catch-up contributions, think about what you can save. Even $50 per paycheck can make a difference in the long run. 

Once you know how much extra you can put into retirement, set up those contributions. Visit human resources or whoever administers your employer-sponsored plan and ask to change your retirement contribution elections. In most cases, you can do this anytime and even make changes multiple times a year.

If you have a self-directed retirement account, log into your online portal and change your contribution amounts. You might also contact your plan administrator or financial advisor if someone is helping you manage your retirement accounts and have them make those changes for you.

One thing to keep in mind is that you can make catch-up contributions to both your 401(k), as well as your IRA/Roth IRA. This means, you could contribute an additional $9,000 in 2023 between your 401(k) and IRA with catch-up contributions.

Our take

Saving for retirement is a critical financial step for people of all ages. Starting early and building wealth for the future can be a great way to support peace of mind and a fully funded retirement. However, there are tools and tips you can use to maximize retirement savings even if you didn't start early, including using catch-up contributions.