Catching Up On Retirement

1 in 3 Americans have saved less than $5,000 in retirement. Many employees’ financial attention has been pulled in multiple directions, including student loans, care for elderly parents or even keeping up with health care costs.  Even if they have retirement accounts, your employees may worry that they aren’t robust enough to handle retirement’s unexpected challenges. However, those who are age 50 or older can benefit from certain IRS rules that allow them to make annual catch-up contributions.  Reviewing the basics about catch-up contributions, and making information available to your employees about catch-up contributions may help settle those worries about being on track.
‍

The most important thing that employees who need to catch up need to know is to start as soon as possible. That means the same advice that younger employees hear is the same that those over 50 need to hear: compounding interest is the key to the catch up. Starting as early as possible may be the key to success.
‍

How Old? The other key point is that the age where employees can start taking advantage of the IRS catch-up rules is usually thought of as age 50, but a deeper read of the IRS rules shows that the IRS allows “individuals who are age 50 or over at the end of the (taxable) calendar year.” That means employees may be able to start setting aside additional amounts towards retirement during the year they turn 50, giving them a few extra months of catch up before they turn 50, an especially good boost for those born in the Fall who could benefit from ten months of extra catch-up contributions.
‍

How Much? The IRS allows annual catch-up contributions of up to $6000 to be saved through 401(k), 403(b) or a governmental plan, among others. That’s $6,000 in addition to the $19,000 allowed by IRS rules for regular contributions (in 2019). Employees may also want information about how catch-up contributions qualify as elective deferrals, based on whether the contribution exceeds the IRS limits or your company’s plan limits. In the IRS’s discussion of catch-up plans, they provide an example of a 55 year old worker who, thanks to the catch-up rules, can contribute a total of $25,000 per year rather than $19,000, since the rules will allow the additional $6,000 as a catch-up contribution.  This is also true for plan-imposed limits. For example, if your company’s plan caps contributions at 10% of income, and an employee earned $100,000, the total they could contribute prior to age 50 would be $10,000. In the year in which the employee turns 50, then can boost that contribution to $16,000, as the IRS will treat the additional $6,000 as a catch-up contribution. Finally, the catch up contribution also allows employees over the age of 50 to use matching contributions to exceed the IRS limit. This can be exceptionally helpful for employees with bonuses and other non-standard compensation rates.
‍

The rules regarding contributions to IRAs differ slightly.  The IRS will allow an additional $1000 towards catch-up in IRAs. However, employees may want to know about whether they are eligible to contribute to both IRAs and your company’s 401(k) program.
‍

How? Employers, and employees, who want to increase their knowledge and access to the catch-up contribution benefit should first review their plan to assess whether are any limits in the plan on catch-up contributions or other elective deferrals. A review of limits on elective deferrals may be worthwhile if the age of your employees increases over time.