Catch-up contributions allow people age 50 or older to save more in their 401(k)s and individual retirement accounts (IRAs) than the usual annual contribution limits set by the IRS. The idea is to make up for the years you didn’t save enough, probably when you were young. Generally people earn more as they advance in years and in their career, which is why catch-up contributions start at age 50. If you have the extra money, it makes sense to make catch-up contributions – caps depend on the kind of retirement account. But how to allocate the money in your portfolio is not so obvious, particularly if you are near retirement age. For help with that, talk to a financial advisor.
Find out now: How much do I need to save for retirement?
Catch-Up Contribution Amounts and Limits
The IRS sets catch-up contributions for eligible retirement plans each year. Of course, you must first reach your plan’s contribution limit before you can make catch-up contributions.
Below, we break down the 2019 and 2020 individual contribution limits and catch-up contribution amounts for different plans.
IRAs: The 2019 and 2020 contribution limits for IRAs and Roth IRAs is $6,000. The catch-up contribution is $1,000. So in total, you can make a contribution of $7,000 if you are 50 or older.
401(k) and Other Workplace Retirement Plans: The annual contribution limit for workplace retirement plans like 401(k)s, 403(b)s, most 457s and the government’s Thrift Savings Plan (TSP) stands at $19,000 (2019) and $19,500 (2020). The catch-up contribution amount for these plans is $6,000 for 2019 and $6,500 (2020). So you can essentially contribute up to $25,000 to these plans in 2019 and $26,000 in 2020 if you are 50 or older.
SIMPLE 401(k): The contribution limit for SIMPLE retirement plan accounts is $13,000 in 2019 ($13,500 in 2020). The catch-up contribution amount is $3,000. So the total you can contribute is $16,000 in 2019 and $16,500 in 2020.
Regardless of what plan you’re in, you don’t have to wait until your 50th birthday to make catch-up contributions. You can begin doing so the year you turn 50.
The Benefits of Catch-Up Contributions
As you can see, the catch-up contribution limit is quite generous across different plan types. You can use our 401(k) calculator to see how much you can expect to gain by taking advantage of catch-up contributions.
So let’s say you turned 50 years old this year and you reached your 2020 individual 401(k) limit. But, you don’t use your catch-up contribution. Assuming an annual return of 7% on your 401(k) investments, a reasonable estimate according to some advisors, your account would grow to $20,865 by next year.
But by taking the full catch-up contribution, it would grow to $27,820. If you do nothing more and let your money grow (at 7%) until you turn 66, you’re looking at a balance of more than $82,000.
In addition, you stand to gain even more if your company offers some type of employer match on your contributions. As noted above, the most you can contribute to your 401(k) if you’re at least 50 years old is $26,000 in 2020. The IRS calls this money that you put into the account “elective deferrals.” They are separate from any employer match your company may offer. So in 2020, the total amount of tax-deferred contributions that can be made to your 401(k) plus all other defined contribution (DC) plans from all sources including your employer is $57,000 or $63,500 if you’re age 50 or older.
DC plans typically cover workplace retirement plans. So if you’re 50 or older, the most you can contribute in 2020 to all your IRAs, including any Roth options, is $7,000.
How to Make Catch-Up Contributions
To begin making these extra contributions, you’ll need to contact your plan administrator or access your account online. You can make this election at any time and change the amount you wish to contribute each pay period if necessary.
Catch-up contributions must be made to 401(k) plans before the end of the year. IRA catch-up contributions, on the other hand, can be made up until the applicable deadline to file your income tax return. This date typically falls in the middle of April.
It’s best to take advantage of catch-up contributions and any other opportunities that can boost your retirement savings. You also want to avoid making investing mistakes that can jeopardize the money you’ve put away. As you get older, you’ll generally want to decrease your risk exposure. But by how much – and how – are the big questions. A financial advisor can help you make the tough switch from accumulating savings to drawing them down.
Tips on Boosting Your Retirement Savings
- Increase your 401(k) contributions as soon as you get a raise. Ideally, you should defer the whole raise until you’ve reached the contribution cap. But any amount is better than nothing. If you do it right away, you won’t miss the added amount withheld from your paycheck.
- Your nest egg will likely grow the most in the stock market. But to mitigate the risk, you’ll want to diversify your investments. If you’re not sure what the right allocation is for you, consult a financial advisor. To find one, use SmartAsset’s free matching tool. It’ll recommend up to three in your area in five minutes.
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