Q:

What is a catch-up contribution to a 401(k) plan?

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Quick Answer

A catch-up contribution to a 401(k) plan is an extra payment in excess of the usual contribution limits for individuals aged 50 or above, according to the Internal Revenue Service. All eligible catch-up contributions have to take place before the end of the year and are made through elective deferrals. The purpose of catch-up contributions is to allow those close to retirement to increase their retirement funds or "catch up" if their funds are lower than desired.

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Full Answer

An investor becomes eligible for catch-up contributions in the calendar year when she turns 50, says Bankrate. The person can contribute the higher amount the year she turns 50 and all years after that. While most 401(k) plans do allow catch-up contributions, they aren't required to do so. Determining if a specific plan allows catch-up contributions allows the investor to plan for the additional contributions throughout the year through increased deductions to disperse the extra amount.

Individuals must make the maximum 401(k) contribution first before making catch-up contributions, notes Bankrate. The maximum amount of the catch-up contributions changes in some years. In 2014, the maximum regular contribution was $17,500, with a catch-up amount of $5,500 for those 50 and over. For the 2015 and 2016 calendar years, the catch-up contribution limit increases to $6,000 for each year, notes the IRS.

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