It’s never too late to start saving for retirement. If you’re over the age of 50, you get a boost that those who are younger don’t. The IRS allows those closer to retirement to contribute above the annual limit to certain employer-sponsored retirement savings accounts. In 2021, you can contribute an additional $6,500, which was the same limit for catch-up contributions in 2020. You can do catch-up contributions to the following qualified retirement plans:

• 401(k) [other than a SIMPLE 401(k)]
• 403(b)
• SARSEP
• Governmental 457(b)

You can also contribute an additional $1,000 in catch-up contributions to IRAs in 2021, if you have one.

To qualify for an extra contribution to your plans, you'll need to turn 50 by the end of the calendar year.

Catch-up contribution defined

Each year, there’s a limit to the amount you can put into a retirement savings account like a 401(k). These limits are set by the IRS and enforced by your plan administrator. Catch-up contributions let older taxpayers put a little extra in each year to accelerate retirement savings as older workers make a final push towards retirement.

Whether it’s a 403(b), SARSEP, 457(b), or 401(k) catch-up contribution, it makes good financial sense to max out what you’re allowed to put into the account. If your employer matches the amount you contribute, that’s free money. Even if not, though, the money goes in pre-tax, which reduces the amount of your annual income that goes to the IRS.

Understanding catch-up contributions

Taxpayers can contribute a certain amount of earnings each year to a retirement savings account without paying taxes on that money. In 2021, that limit is $19,500, the same as it was in 2020. Catch-up contributions let those over the age of 50 contribute an additional $6,500.

For 2021, the total you can contribute, including the maximum 403(b) or 401(k) catch-up contribution, is $26,000. That means if you reach the age of 50 before the end of the 2020 calendar year, you can contribute $26,000 of your income without paying taxes on it. Obviously, putting that much of your salary into a retirement account may not be an option, but the more, the better for your future retirement.

Catch-up contributions for various retirement plan types

If you have a retirement savings account through work, chances are it’s a 401(k) or 403(b). If you work for the government, it might be a 457(b). Often these plans allow you to contribute money before payroll taxes are applied in your paycheck. You don’t get away tax-free, though. With these plans, you pay taxes when you take the money out in retirement.

Then there are Roth plans. Roth plans can be a good deal for some because the money has already been taxed by the IRS prior to making investment contributions. Those contributions then grow tax-free and eventually, when you retire, you enjoy tax-free distributions on those funds. You’ll have to wait until the minimum distribution age, which is 59½, to take the money out without penalty. But the Roth option isn’t the best route for everyone.

If you’re researching what is a catch-up contribution, a traditional plan may be the best option for you. For younger taxpayers, tax rates may be much higher when they retire, making it wise that they pay taxes on the money when they put it in—i.e., a Roth retirement savings account. Tax rates aren’t as likely to change dramatically if you’re retiring in the next few years, so you won’t reap the same rewards. When considering your investment options and potential tax diversification, it's worth discussing your particular circumstances with a qualified Certified Financial Planner®.

Roth and traditional IRA contribution limits

The typical employer-sponsored retirement savings plans aren’t the only choices you have when it comes to retirement savings. You can invest in an IRA on your own if your employer doesn’t offer it as an option. As with other retirement accounts, you have two choices: a Traditional IRA, which defers taxes on contributions today but are taxable when you make retirement withdrawals, or a Roth IRA, which uses post-tax money and grows tax-free.

If you’re investing in an IRA, catch-up contributions apply here, as well. In 2020, you can invest $1,000 extra by the date of your tax return. That’s in addition to the IRA contribution limit of $6,000, or $7,000 if you’re age 50 or older. These contribution and catch-up limits haven’t changed in 2021 from the limits for contributions and IRA catch-up in 2020.

Bottom line

Although you may not be able to afford to max out your retirement savings contributions, it can help to contribute as much as you can. Check with a Certified Financial Planner® to find out the tax benefits you can get by contributing more of your earnings to any retirement savings accounts you have.

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