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.
To help remediate this issue, Congress passed a law that can help older workers 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 over age 50 to make contributions to their qualified retirement plans in excess of the limits imposed on younger workers.
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. These limits may be imposed by the IRS and/or the plan itself.
Now that you understand what catch-up contributions are, let’s look at the eligibility requirements to make these contributions.
Requirements for Catch-Up Contribution Eligibility
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 SARSEP, 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.
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.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.
Ascend Investment Partners is not a legal or tax advisor. You should consult with your attorney, accountant and/or estate planner before taking any action. Ascend Investment Partners did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Ascend Investment Partners or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy Services offered through Kesler, Norman & Wride, LLC dba Ascend Investment Partners, a Registered Investment Advisor. This message and any attachments contain information which may be confidential and/or privileged and is intended for use only by the addressee(s) named on this transmission. If you are not the intended recipient, or the employee or agent responsible for delivering the message to the intended recipient, you are notified that any review, copying, distribution or use of this transmission is strictly prohibited. If you have received this transmission in error, please (i) notify the sender immediately by e-mail or by telephone and (ii) destroy all copies of this message. If you do not wish to receive marketing emails from this sender, please send an email to email@example.com Please note that trading instructions through email, fax or voicemail will not be taken.
To Get Started Click Here
Sign Up for Email to stay in touch