Catch-Up Contributions

Recently, a survey found that 23% of people felt very confident that they would have enough money to live comfortably throughout their retirement years, but 33% of survey respondents indicated they were not confident.¹ That means 1/3 of the population is unsure whether or not they will have enough money to last them through retirement.

To help address this issue, Congress passed a law that allows older workers to make up for lost time with catch-up contributions. Unfortunately, few people may understand how this generous offer can add up.² Let’s explore what catch-up contributions are and who is eligible to make them.

What are Catch-Up Contributions?

Workers over age 50 are allowed to make contributions to their qualified retirement plans more than the limits currently imposed on younger workers. These excess contributions are called catch-up-contributions.

In 2021 contributions to a traditional 401(k) plan are limited to $19,500.³ If allowed by the 401(k) plan, participants age 50 and older can also make catch-up contributions. Participants may make additional elective salary deferrals of $6,500 in 2021 to traditional and safe harbor 401(k) plans.

Setting aside an additional $6,500 each year into a tax-deferred retirement account has the potential to make quite a difference in the future balance because 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 catch-up contributions, let’s take a look at the eligibility requirements to make these contributions. 

Requirements for Catch-Up Contribution Eligibility

The main requirement to be a catch-up eligible participant is that you are at least 50 years old. You may actually be able to take advantage of these contributions before your birthday, though. 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 you were born 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 beginning at the start of your plan year. 

Another important aspect of catch-up contributions to keep in mind 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 first check the terms of your specific retirement plan to understand your catch-up contribution eligibility as plans can be set up differently. 

One last note about catch-up contribution eligibility is that even though you may be 50 years old or older, that doesn’t necessarily mean that you are eligible for catch-up contributions in the form of the regular $6,500 illustrated above. As an 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 adding these contributions together is 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 on top of it. 

As you near retirement, it becomes more important to understand how much money 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 very helpful as you prepare for this important life milestone.