Are You Eligible For Catch-Up Contributions?

by | Nov 9, 2021 | Blog

Catch-up contributions allow workers approaching retirement age to contribute excess money into their retirement plans. 2021 is winding down but there is still time to make these extra contributions if you meet the requirements.

In this blog post, we’ll cover what those requirements are, how much extra catch-up contributions allow you to save and much more!

Why Were Catch-Up Contributions Created?

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. 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. 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. If permitted by the 401(k) plan, participants age 50 and over can also make catch-up contributions. These excess contributions can be as much as an additional $6,500 per year.

That is a total of $26,000 of contributions that can be made to traditional 401(k) plans if you are over age 50.

In many cases, your 50’s are your highest earning years. Making the benefits of these contributions two-fold. 1.) More money compounding for retirement 2.) Less taxable income.

This sounds good, so what are the requirements?

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 50th 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.”

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.

We like to say, it’s about time in the markets, not timing the markets. While your 50’s might be the end of your working years, your portfolio will need to continue to grow for potentially another 50 years. So don’t discount being able to put in that extra $6,500 per year. Do it, if you can!

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. If you have questions about catch-contributions or retirement planning, get in touch with us!

**Check out a recent video we did on catch-up contributions!!**

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