Catch-up Contributions

In recent years, Congress came up with catch-up contributions through The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) because they felt that Baby Boomers wouldn’t have enough in their savings to properly retire. To make up for what they thought may have been missing, they began allowing Boomers to add more to their investment pots once they reach the age of 50 – or more specifically, in the year that they reach their 50th birthday. So now, in addition to the traditional 401k plan that allows you to save up to $15,500 of your eligible pay each year like everyone else, you can also take advantage of catch-up contributions, which allow you to save up to $5,000 more each year.

Catch-up contributions work well whether you belong to one plan or two – or even if you belong to a company that doesn’t allow it. For example, if you belong to two 401k plans at the same time, you can make contributions for the maximum amount to both simultaneously. So instead of a max of $5,000 that is allowed with one plan, you could contribute for a total of $10,000 per year if under two plans. Also, if you belong to more than one employer (and thus more than one plan), even if neither company allows for catch-up contributions, you can still contribute up to $20,500 ($15,500 for standard elective deferrals plus $5,000 extra in catch-up contributions) total between the two plans – as long as you don’t exceed $15,500 in either plan. In other words, you can contribute $15,500 with one plan and $5,000 in the other. Or $10,250 in both plans. Or $7,500 in one and … you get the picture, right?

The eligibility for catch-up contributions is as follows:

You must be 50-years-old or turning 50 within the calendar year.
You must be getting paid from your employer (since the contributions are actually deductions from your paycheck).
You must contribute the amount that will help you reach your elective deferral limit by the end of each relevant year.
And you cannot be in the 6-month period of non-contribution because you’ve received a financial hardship withdrawal.

Catch-up contributions are available for the 401k, 403b (Tax Shelter Annuity) and 457 (Deferred Compensation) plans, in addition to IRAs. Because you can participate with multiple plans, it is good to know that the rules differ among them. So, for instance, if you have rolled over your retirement funds to say an IRA since you’ve reached the age of 50, you will need to make sure to check for new contribution guidelines that are different than what you’re used to.

It is good to note that while this plan is offered by over 90 percent of businesses, they are not required to match your contributions. So be sure to check with your employer to see how this works at your company. But whatever you decide, you’ll probably find that taking this route will be more beneficial in helping you save than by trying to set up a savings plan on your own.


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