Are you confident that you will have enough savings to retire?
A recent survey found that 23% of people were very confident about having enough money to live comfortably through their retirement years, but 33% were not confident.1 That’s a third of the population that is unsure whether or not they’ll have enough money to last them throughout retirement.
Since many people aren't saving enough (or got a late start), Congress passed a law that can help workers age 50 and older, make up for lost time with catch-up contributions. But few may understand how this generous offer can add up.2
Let’s learn more about what catch-up contributions are and help you determine whether or not you’re eligible.
What are Catch-Up Contributions?
Catch-up contributions allow workers who are age 50 or older to make contributions to their qualified retirement plans in excess of the limits imposed on those under 50.
Contributions to a traditional 401(k) plan are limited to $19,500 in 2021.3 If permitted by the 401(k) plan, participants age 50 and over can also make catch-up contributions. You may contribute additional elective salary deferrals of $6,500 in 2021 to traditional and safe harbor 401(k) plans.
Setting aside an extra $6,500 each year into a tax-deferred retirement account has the potential to make a big difference in the eventual balance since these contributions are elective deferrals that exceed the regular limits. If one starts saving an extra $6500 from age 50 to 65, that is another $97,500 saved toward retirement.
Now that you understand what catch-up contributions are, let’s look at the eligibility requirements to make these contributions.
Am I Eligible for a Catch-Up Contribution?
The main requirement of being a catch-up eligible participant is that you are at least 50 years old. But you may actually be able to take advantage of these contributions even before your birthday. The IRS states that “a participant is catch-up eligible with respect to a plan year if the participant turns age 50 by the end of the calendar year in which the plan year ends.”4
This means that even if your birthday is in July, if your plan has a plan year of January–December, you may be deemed “age 50” in January and can therefore make catch-up contributions starting at the beginning of your plan year.
Another important aspect of catch-up contributions is the eligibility of your retirement plan. Catch-up contributions may be made to a 401(k) plan, a 403(b) plan, a governmental 457(b) plan, a SEP IRA , a SIMPLE 401(k) or a SIMPLE IRA, but you should check the specific terms of your retirement plan to understand your catch-up contribution eligibility as plans can be set up differently. Lastly, you can also add an extra $1,000 to your IRA or Roth IRA if you are 50 or older. (assuming you qualify to make a contribution and your income limits are below a certain threshold.)
A last note about catch-up contribution eligibility is that just because you are 50 years old or older doesn’t mean that you are eligible for catch-up contributions in the form of the regular $6,500 stated above. For example, your 401(k) plan might have its own elective deferrals, an employer match and a profit sharing contribution. As of 2021, the dollar limitation on annual additions according to the IRS is $55,000. If all of these contributions together add up to more than $55,000, that difference counts as your catch-up contributions if you are over 50, up to $6,500. Meaning, you don’t then get an additional contribution.
As you near retirement, it’s important to understand how much you can (and should be) contributing to your retirement plan, as well as other tax and deferral implications. Working with a qualified financial advisor can be illuminating as you prepare for this important life milestone.
As always, when making big financial decisions, it is always best to speak with and take the advice of a Certified Financial Planner® practitioner. Any questions, we are here to help you figure it all out.
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All the best.
Rick Fingerman, CFP®, CDFA™, CCFS®
Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.