By: Kaleb Robuck
A recent survey found that 23% of people were very confident about having enough money to live comfortably through their retirement years, but 33% were not confident.1 That's a third of the population that is unsure whether or not they'll have enough money to last them throughout retirement.
To help remediate the issue, Congress passed a law that can help older workers make up for lost time with catch-up contributions. But few may understand how this generous offer can add up.2 Federal Employees may have different retirement accounts than other workers, such as TSP or Thrift Savings Plan. Let's learn more about what catch-up contributions are and help you determine whether or not you're eligible.
What are Catch-Up Contributions?
Catch-up contributions allow workers who are over age 50 to make contributions to their qualified retirement plans in excess of the limits imposed on younger workers.
Contributions to a traditional 401(k) plan or TSP are limited to $19,500 in 2021.3 If permitted by the plan, participants age 50 and over can also make catch-up contributions. You may contribute additional elective salary deferrals of $6,500 in 2021 to traditional and safe harbor 401(k) plans, as well as TSP accounts. This would bring your 2021 contribution total to $26,000 in one of these plans.
Setting aside an extra $6,500 each year into a tax-deferred retirement account has the potential to make a big difference in the eventual balance since these contributions are elective deferrals that exceed the regular limits. These limits may be imposed by the IRS and/or the plan itself.
Now that you understand what catch-up contributions are, let’s look at the eligibility requirements to make these contributions.
Requirements for Catch-Up Contribution Eligibility
The main requirement of being a catch-up eligible participant is that you are at least 50 years old. But you may actually be able to take advantage of these contributions even before your birthday. The IRS states that “a participant is catch-up eligible with respect to a plan year if the participant turns age 50 by the end of the calendar year in which the plan year ends.”4
This means that even if your birthday is in July, if your plan has a plan year of January–December, you may be deemed “age 50” in January and can therefore make catch-up contributions starting at the beginning of your plan year.
Another important aspect of catch-up contributions is the eligibility of your retirement plan. Catch-up contributions may be made to a 401(k) plan, a 403(b) plan, a TSP, a governmental 457(b) plan, a SARSEP, a SIMPLE 401(k) or a SIMPLE IRA, but you should check the specific terms of your retirement plan to understand your catch-up contribution eligibility as plans can be set up differently.
A last note about catch-up contribution eligibility is that just because you are 50 years old or older doesn’t mean that you are eligible for catch-up contributions in the form of the regular $6,500 stated above. For example, your 401(k) plan might have its own elective deferrals, an employer match and a profit-sharing contribution. As of 2021, the dollar limitation on annual additions according to the IRS is $55,000. If all of these contributions together add up to more than $55,000, that difference counts as your catch-up contributions if you are over 50, up to $6,500. Meaning, you don’t then get an additional contribution.
2022 Thrift Savings Plan Contribution Limits
For 2022, the annual contribution limit for TSP’s increased to $20,500. However, you can lose Agency Matching contributions if you reach the annual limit before the end of the calendar year and are covered by Federal Employees Retirement System.5 The Catch-up contribution limit for next year is the same at $6,500.
It is crucial to be extremely careful when making your contribution elections accurately into myPay because Employee Benefits cannot stop or change that election after entered.5 Find out more about 2022 TSP limits here.
As you near retirement, it’s important to understand how much you can (and should be) contributing to your retirement plan, as well as other tax and deferral implications. Working with a qualified financial advisor can be illuminating as you prepare for this important life milestone.