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. Give us a call if you need guidance around what is best for your specific situation.
Evergreen Financial Group is a Fee-Only Financial Planning and Investment Firm located in Billings, MT serving clients in Montana, Wyoming and virtually across the country. Evergreen Financial Group specializes in working with Christian families, including young professionals, Current and Future Retirees and Church Staff Members.
This content is developed from sources believed to be providing accurate information. 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. Evergreen Financial Group, LLC is a registered investment advisor offering advisory services in Montana and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. This communication is for informational purposes only and is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This communication should not be relied upon as the sole factor in an investment making decision. All opinions and estimates constitute Evergreen Financial Group’s judgement as of the date of this communication and are subject to change without notice. Evergreen Financial Group does not warrant that the information will be free from error. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk. Under no circumstances shall Evergreen Financial Group be liable for any direct, indirect, special or consequential damages that result from the use of, or the inability to use, the information provided herein, even if Evergreen Financial Group or a Evergreen Financial Group authorized representative has been advised of the possibility of such damages. Information contained herein should not be considered a solicitation to buy, an offer to sell, or a recommendation of any security in any jurisdiction where such offer, solicitation, or recommendation would be unlawful or unauthorized.