Are You Caught Up On Catch-Up Contributions?
Millions of baby boomers are closing in fast on retirement, and while retirement savings are coming up short for many, the IRS allows you to significantly boost your savings once you turn 50.
These catch-up contributions can make a big difference in attaining financial security in retirement, so let's review the IRS' catch-up contribution limits for 2017, and provide some insight into just how valuable this tool can be.
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Workplace retirement plans
People participating in workplace retirement plans, including 401(k) and 403(b) plans, can contribute up to $18,000 of earnings to their plan in 2017. However, participants over age 50 can stash away an additional $6,000 in 2017.
Because of that catch-up contribution, some workers can set aside up to $24,000 in these plans next year, which is, potentially, a game-changing amount of money when you consider the benefits over time of compound interest, or the ability for interest to earn interest.
Some participants in 403(b) plans can make an even bigger contribution, if they meet certain requirements. If your 403(b) plan permits it, employees with at least 15-years of service with a public school system, hospital, home health service agency, health and welfare service agency, church, or convention or association of churches (or associated organizations), then the elective deferral limit is increased by the lesser of:
1. $3,000.
2. $15,000, reduced by the amount of additional elective deferrals made in prior years because of this rule.
3. $5,000 times the number of the employee's years of service for the organization, minus the total elective deferrals made for earlier years.
Because of this quirk, it's possible for some to contribute $18,000 to a 403(b) plan, plus $3,000 as a 15-year rule contribution, plus another $6,000 as a catch-up contribution. The rules are complex, so make sure to discuss this option thoroughly with your human resource department.
In all cases, these are limits. So, you don't have to contribute the full amount. Even if you contribute an extra $1,500 per year under the $6,000 catch-up contribution rule, it can still give your nest-egg a big boost.
For example, if you have $100,000 in a 401(k) now, and you contribute the normal maximum 401(k) contribution of $18,000, plus an additional $1,500 catch-up contribution, every year for the next 15 years, your account would grow to be worth $693,537, assuming a 6% annual compounded interest rate. Contribute the full $24,000 allowed, and your account could grow to $798,279.
Traditional, Roth IRAs, and other IRAs
If you don't participate in an employer-sponsored plan, you can still benefit from catch-up contributions to traditional IRAs and Roth IRAs.
In 2017, the catch-up contribution to either a traditional IRA or a Roth IRA is $1,000. That limit means that people over 50 years old can contribute a total of $6,500 to either one of these IRAs next year.
Simple 401(k) plans and Simple IRAs allow for a $3,000 catch-up contribution in 2017. SARSEP, or SEP IRA, plans are treated like workplace plans, so they qualify for the $6,000 catch-up contribution limit.
Double-dipping on catch-up
In some instances, you can contribute catch-up contributions to both a workplace plan and an IRA. All you have to do is qualify.
In the case of a traditional IRA, if you participate in a workplace 401(k) or 403(b) plan, you can make tax-deductible contributions to it as long as your modified adjusted gross income is $62,000 or less, if single, or $99,000, or less, if married.
The ability to take deductions on traditional IRA contributions phases out above those income thresholds.
Roth IRAs are never tax-deductible, however, you can only contribute to them if your income is below specific amounts. In 2017, you can contribute fully to a Roth if you're single and your modified adjusted gross income (MAGI) is below $118,000, or if you're married and your MAGI is below $186,000. If your income is higher than that, then contribution levels phase out.
Source: Internal Revenue Service.
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