If you’re among the millions of Americans putting money into a workplace retirement plan, you probably know that IRS rules limit annual tax-deferred contribution amounts. For example, 401(k) and 403(b) participants can set aside a maximum of $19,500 in income on a tax-deferred basis in 2020. But if you’re age 50 or older, you could be eligible to contribute amounts that exceed the standard IRS limitations.
Catch-up contributions, as the name implies, allow workers to save more tax-deferred income as they get closer to traditional retirement age. Allowable catch-up amounts vary depending on the type of retirement plan. For our 401(k) or 403(b) example, the catch-up amount is $6,500 in 2020.
Catch-up contributions only extend the amounts workers can contribute to their plans each year. They do not increase employer-match limits.
The IRS updates annual contribution limits each year—including catch-up contribution amounts—for each type of retirement plan. A professional financial advisor can explain the rules that apply to your specific account to you.
Should you get in on this?
If you’re 50 or over and looking to grow tax-deferred savings for retirement, and you already max out your plan’s limits each year, making catch-up contributions might be right for you.
On the other hand, if a large portion of your retirement savings is in tax-deferred dollars, you could be facing a sizable income-tax burden when you retire and begin taking plan distributions. In that case, there might be better retirement savings options for you than increasing your tax-deferred contributions.
Because everyone’s financial needs and objectives are unique, we can’t over-stress the importance of consulting a trained financial advisor when planning for retirement. A qualified professional can help forecast whether you’re saving enough for the retirement lifestyle you want—and help you determine if you have any “catching up” to do.
