Ubiquity Retirement + Savings has been an affordable provider of retirement solutions, including Safe Harbor 401(k) plans, designed for small businesses, start-ups, and solopreneurs since 1999.
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Catch-up contributions are the same for Safe Harbor 401(k) plans as for traditional 401(k) plans.
Safe Harbor 401(k) plans, like all 401(k) plans, allow individuals who will be age 50 or older before the end of the year to save an extra $7,500 in 2023 in their 401(k) as a catch-up contribution. These additional contributions are permitted to help individuals who are nearing retirement make up for prior years when they may not have been able to save in a 401(k).
In order to save the extra $7,500:
The great majority of 401(k) plans permit catch-up contributions. If an employer has not allowed catch-ups in the past, but would like to, the plan administrator may amend the plan.
The Internal Revenue Service sets annual limits for catch-up contributions. For 2023, that limit is $7,500.
That means, if you are age 50 or older, you may contribute a maximum of $30,000 to your 401(k) plan ($22,500 + $7,500). Any contributions from your employer, via your Safe Harbor match, do not count toward your contribution limit. The total that may be contributed by both employee AND employer, including the catch-up contribution, is $73,500 a year.
Depending on the provisions of your plan, your employer may opt to match any catch-up contributions made. Plans that allow for employer matching of catch-up contributions are still subject to the restrictions specified by the plan. So, for instance, if an employee over 50 makes $50,000 a year, and the employer matches 50% up to 6%, the employer will contribute up to $3,000 (which is 6% of $50,000). If the employee contributes the maximum $22,500, the employer would have already hit the $3,000 limit, so the catch-up contributions won’t be matched.
By IRS rules, the most an employer can match is $40,500 for 2023. If this threshold is possible with your employer’s plan, your catch-up contributions might be matched.
Like a normal contribution, the catch-up can be pre-tax or post-tax, as permitted by the plan your employer has designed. Whenever your regular contributions are taxed is when your catch-ups will be taxed as well – either upfront or upon withdrawal in retirement.
Though most plans offer catch-up contributions, it is estimated that less than half of workers take advantage of it. They are missing a tremendous opportunity. Not only do these contributions reduce tax liability by thousands of dollars, but the capital and interest generated can be staggering. With a modest 6% annual return rate, making catch-up contributions from age 50 to 65 could potentially result in $140,000 more saved. Assuming a 25-year retirement, that $140,000 could grow to $600,000 during one’s retirement years.
Contact Ubiquity, a low-cost small business 401(k) administrator with a flat fee, to learn more about Safe Harbor 401(k) plans and catchup contributions.