What Should I Contribute As a Catch-up Safe Harbor 401(k)?

Catch-up contributions are the same for Safe Harbor 401(k) plans as for traditional 401(k) plans.

What is a catch-up contribution?

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).

Who is eligible to make a catch-up contribution?

In order to save the extra $7,500:

• You must be at least 50 years old or turning 50 years old in this calendar year.
• Your regular plan contributions must reach the annual deferral limit, the plan deferral limit, or the annual ADP limit for highly compensated employees before you can put in the additional funds.

Do all 401(k) plans allow catch-up contributions?

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.

How much can I contribute as a Safe Harbor 401(k) catch-up?

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.

Can Safe Harbor catch-up contributions be matched?

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.

When are taxes due on the catch-up contributions?

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.

Are catch-up contributions worth it?

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.