What are Catch-Up Contributions, and Why Are They Important?
Updated: Nov 7, 2019
One of the most common workplace benefits that employees often take for granted is their retirement plans or any other savings accounts they have available to them. These accounts often take a backseat in our financial lives, largely because we automate how we use them. Automating our contributions often feels like a “set it and forget it” task that we can check off our financial to-do list. This is a double-edged sword.
On one side, automating retirement savings - or any savings, for that matter - is a fantastic way to ensure that it gets done. When we have to manually save each month, we’re less likely to follow through. However, on the other side, automation often lulls us into complacency. We often get so accustomed to saving the same way: we have the same amount taken out of each paycheck to fund workplace savings accounts, even if we can (and should) be saving more.
For example, did you know that if you’re over the age of 50, you’re eligible to contribute more to several workplace savings accounts each year? Many people have heard of catch-up contributions, but only 16% of eligible plan participants take advantage of them.
Whether you’re enrolled in a 401(k), 403(b), or 457 plan - or you have access to a Health Savings Account or a SIMPLE IRA - you could be taking advantage of an increased contribution limit. These contributions, known as “catch-up” contributions, are structured by the IRS to help people nearing retirement give their savings a little extra boost.
What Are Catch-Up Contributions, and Why Should You Use Them?
Catch-up contributions, offered by the IRS, are intended to help people age 50+ put more toward their retirement savings. This added benefit is twofold:
You’re able to sock more away before retirement. This is a benefit whether you’ve been saving over the course of a long career, or got started a little bit late. Having a few extra thousand dollars lining your retirement nest egg is never a bad thing.
You lower your taxable income even more. While this may or may not push you into a lower income tax bracket, it will save you some money on taxes during your next filing season.
Additionally, many employers offer a 401(k) catch-up match. Most 401(k) plans offer catch-up contributions, and of them, a full 36% of employers sponsoring the plan match those contributions. This could mean by not participating in catch-up contributions, you end up leaving money on the table.
What Accounts Offer Catch-Up Contributions?
Several savings accounts (retirement or otherwise) offer a catch-up contribution. The IRS’s official list includes:
HSA (Health Savings Account)
What Limits Should You Be Aware Of?
Each type of account has a different contribution limit associated with it. These limits can change year-to-year, so it’s important to check in periodically to see if you can potentially contribute more than you could in previous years.
For example, in 2019, you can make the following catch-up contributions.
401(k), 403(b), SARSEP, 457(b): $6,000 in addition to your annual limit of $19,000
SIMPLE IRA, SIMPLE 401(k): $3,000, salary reduction contributions aren’t treated as catch-up contributions until they exceed $13,000.
Traditional IRA, Roth IRA: $1,000 in addition to your annual limit of $5,500
HSA: $1,000 in addition to your annual limit of $3,500 (single) or $7,000 (family)
All told, taking advantage of catch-up contributions across multiple health or retirement savings accounts could help you grow your retirement savings by several thousand dollars each year - and that’s nothing to sneeze at!
The Untold Benefit of Catch-Up Contributions
The benefits of catch-up contributions may seem obvious. You get to save more for retirement and reduce your annual taxes - what more could you possibly ask for?
The truth is, there’s another benefit of catch-up contributions that nobody’s talking about: catch-up contributions force you to do a pre-retirement financial pulse check.
You may think you know your financial situation inside and out. Maybe you’ve been saving dutifully for years, and know exactly what your “magic number” is for retirement savings. Unfortunately, more often than not, we view retirement savings as a static path.
There’s one end goal, and we work toward it kind of mindlessly.
There’s one thing we consistently forget to take into account: life changes. Our goals change. Our investments change. Our job security as we near retirement can shift. There are thousands of unknown variables that make retirement savings a full-contact sport. Automation is a fantastic way to ensure you get somewhere in the right savings zone by the time you retire, but checking in and reevaluating your goals as you get closer to the end-date of your career is non-negotiable.
Checking in on your savings progress is an excellent first step. From there you can start to consider how you want to spend your days as a retiree, build a retirement budget, and start making financial and lifestyle changes that will help you achieve the retirement you’ve always envisioned.
Want help? Contact us today. We’d love to help you evaluate your eligibility for catch-up contributions and kick off your retirement planning journey.
Author: Mark Fonville, CFP®
Mark is a wealth manager and President of Covenant Wealth Advisors, an independent and fee-only wealth management firm with offices in Williamsburg, VA and Richmond, VA. He has been a CERTIFIED FINANCIAL PLANNER™ since 2005. Read Mark's bio