In 2001 a major tax reform was signed that allowed Americans age 50 and older to contribute additional funds into their retirement plans.1 These 401k catch-up contributions were created by Congress to give baby boomers who might not have saved enough the option to increase contributions at a time when retirement is drawing closer. However, you can still make these extra 401(k) contributions even if you're ahead in your retirement savings, as long as you meet the age requirement.
Catch up contribution basics
Catch-up contributions refer to the additional contribution that people age 50 or older are eligible to make each year on top of their annual contribution limit for 401(k) plans. The amount of the catch-up contribution can vary with inflation from year to year.
The IRS made a cost-of-living adjustment that increased the catch-up contribution limit for employees age 50 or older for 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan from $5,500 to $6,000 in 2015.2 The additional catch-up contribution limit for IRAs however, has remained the same at $1,000.
Eligibility
Making extra contributions can really help give your retirement savings a boost. However, contributing to them comes with certain conditions - the first being that your plan has to permit them. You can begin making catch-up contributions to your IRA and 401(k) in the calendar year in which you turn age 50, in excess of the annual contribution limit of your plan.3 Catch-up contributions are possible in 401(k), 403(b), 457 plans, and IRAs; however, the rules will differ among plans.4
Tax benefits
Catch-up contributions for traditional 401(k) plans are treated the same way as other employee contributions to the plan in that the money is not included in your taxable income for the year.
1. http://about401k.com/contributions/limits/catch-up/
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