What Are Catch Up Contributions?

Catch up contributions are a type of contribution that is allowed with several qualified retirement plans. These contributions are in excess of the standard contributions that are allowed by the retirement plan. Here are the basics of catch up contributions and why they are important.

Catch Up Contributions

The IRS recognizes that many people get a late start when it comes to saving for retirement. Because of this, they have instituted catch up contributions for most of the retirement plans out there. These catch up contributions make it possible for those that are close to retirement to set aside more money. 

Examples

Both the 401k and the IRA allow for catch up contributions by the account holder. With the 401k in 2010, you are allowed to contribute as much as $16,500 towards your retirement. If you qualify for catch up contributions, you can actually put aside another $5500 toward your retirement. This brings the grand total of two $22,000 per year. 

With the IRA, the catch up contributions are not quite as drastic. The current maximum contribution for an IRA account is $5000 per year. If you qualify for catch up contributions, you can contribute another $1000 in order to bring the total contribution up to $6000. 

Qualifying 

Not everyone is eligible to make these catch-up contributions. In order to qualify, you have to be at least 50 years old. Anyone under this threshold will not be able to make these contributions and will have to continue making the maximum contribution otherwise.

Importance

These catch-up contributions are extremely important for individuals to get started saving for retirement late. If you have not made the full contributions up until you turn 50 or you have not made any contributions, you need to start making a full catch-up contributions. When you are 50 years old, you only have roughly 10 years until you could potentially think about retiring. With both the 401k and the IRA, the age that you can start taking withdrawals is at 59 1/2. While you do not necessarily have to start taking withdrawals until you reach the age of 70, most people would like to retire before that point. You need all of the help that you can get when you only have 10 years to go until retirement.

Roth Accounts

If you contribute to a Roth IRA or a Roth 401k, you will essentially be able to put away even more money with these catch-up contributions. While technically, the limits are still $22,000 and $6000, you are putting way more effective money. With Roth accounts, you are funding them with after-tax money. This means that when you have a Roth IRA, you are actually designating more than $6000 towards funding that account when you put $6000 in. You have already paid the taxes. With a traditional IRA, you are only designating $6000 and the amount that you can spend of that will be less after taxes are taken out.

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