Are You Eligible for Catch-Up Contributions?

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. However, 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, and will rise to $20,500 for 2022.³ 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 and 2022 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.

When it comes to traditional IRAs and Roth IRAs, you are allowed a catch-up contribution of an additional $1,000 per year, which increases the annual limit to $7,000.

For Health Savings Accounts (HSAs), there is also a catch-up contribution of $1,000 per year.

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 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. For 2021, the dollar limitation on annual additions for catch-up contributors, according to the IRS, is $64,500. If all of these contributions together add up to more than $64,500, then you can't make the full $6,500 catch-up contribution.

It's also important to note that the annual limit for traditional IRA and Roth IRA plans is cumulative. If you're eligible for the cactch-up contribution, the annual limit is $7,000 combined. You may contribute $3,500 to each plan, for $7,000 total. You may not contribute $7,000 to each account or go over the $7,000 limit with combined contributions between the two types of accounts. The same goes for having more than one IRA account and/or more than one Roth IRA account. They are all cumulative.

For HSAs, the $1,000 catch-up contribution is not affected by and does not affect IRA, Roth IRA, or qualified retirement plans. However, the catch-up caontribution is available only if age 55 or older, up to age 65 or until you enroll in Medicare

As you near retirement, it’s important to understand how much you can (and should) contribute to your retirement plan, as well as other tax and deferral implications. It's advisable to work with financial professional to help you prepare for this important life milestone, and Escient Financial is here to help.