Are you over 50? You can take advantage of catch-up contributions.

Somewhere between good intentions to save for retirement and meeting day-to-day expenses, your retirement funds may have fallen short. If you are concerned that you might not have enough money to last through your retirement years, or would like to “top off” your retirement savings, making catch-up contributions is a way to grow your retirement savings faster.

Catch-up contributions allow you to contribute to certain tax-favored retirement accounts above the normal contribution limit. It is a way to make up for lost time.

It was created by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), out of concern that baby boomers had not been saving enough for retirement. Originally, the ability to make catch-up contributions under EGTRRA was set to end at around 2011. However, the Pension Protection Act of 2006 made catch-up contributions permanent.

You are eligible to make catch-up contributions to your employer sponsored retirement plan if:

You are age 50 or older, or you will reach age 50 by the end of the year.
Your plan offers a catch-up feature (most of all plans allow it, but if you are unsure if your plan does, check with your benefits department).
Your plan contributions must reach at least one of the following limits before catch-up contributions can begin:
- the annual deferral limit (Illustrated in chart below)
- the plan's deferral limit (If your employer-sponsored retirement plan restricts your annual contributions to an amount that is less than the federal limit for participants in your type of plan, you should still be able to make a full catch-up contribution)
- the annual ADP limit for Highly Compensated Employees (www.irs.gov)

Whether or not you participate in a retirement plan at work, you need only meet the age 50 requirement to make an additional catch-up contribution.

Overview of catch-up contribution annual limits 2015:

Catching up will add up!

You may not think it will make much of a difference to your retirement savings picture, but consider this:

Imagine that someone has saved $50,000 toward retirement by age 50. At that point, the person continues monthly savings contributions that total $18,000 yearly earning an 8% return in a 401(k) plan. By the time the person turns 65, the account will be worth just over $684,403.

By contrast, if the same person added the maximum allowed $6,000 catch-up amount each year, the account would swell to a little more than $857,422 by age 65.

In addition, by making catch-up contributions, you can save money on taxes now. Since contributions to qualified accounts are made with pre-tax dollars, this will reduce your taxable income.

Other catch-up rules to be aware of:

You can never contribute more than you've earned for the year.
The annual contribution limit is indexed to inflation.
The IRS has indicated that regular and catch-up contributions can be reported together on W-2 forms.
Plan participants must make catch-up contributions to a retirement plan via elective deferrals.
Contributions can only be made from basic pay (not bonuses).
You can start or stop the contribution at any month to be effective the first payroll of the following month.
When filing your 2014 tax return in 2015, you need to refer to the 2014 limits. The 2015 limits are applied to 2015 tax returns filed in 2016.403(b) programs may have an additional “catch-up” provision called the 15-year rule. To qualify, workers must have completed at least 15 years of service with the same employer (years of service need not be consecutive), but cannot have contributed more than an average of $5,000 in previous years.

Carol Chaudet

(last updated 6/26/15)