By Ian Berger, JD
Tax Day 2022 seems like an appropriate time to review a sometimes-overlooked way to get extra dollars into your IRA or company savings plan. Folks age 50 or older are allowed to make “catch-up” contributions with no strings attached. These extra contributions allow you to build up your savings while enjoying an immediate tax break (if making pre-tax contributions) or a tax break down the road (if making Roth contributions).
The catch-up limit for 2022 traditional or Roth IRA contributions is $1,000 if you’re age 50 or older by the end of the year. This means you can make a total 2022 IRA contribution of up to $7,000 – as long as you are otherwise eligible for the IRA. The IRA catch-up is frozen at $1,000, but Congress is considering legislation that would increase it based on inflation.
The catch-up limit for 2022 401(k) plan deferrals is $6,500 if you’re age 50 or older. This allows total 2022 plan deferrals (pre-tax and Roth) of up to $27,000. The plan catch-up limit is indexed periodically.
Despite their name, age 50 catch-up contributions are available even if you’ve contributed the maximum amount in all prior years. And, you can use the age 50 catch-up for both workplace plans and IRAs in the same year.
403(b) and 457(b) participants have even better catch-up opportunities. A 403(b) plan may allow employees with at least 15 years of service to make up to an additional $3,000 of annual catch-up contributions. There is no age requirement for this catch-up, and it can be used on top of the age 50 catch-up. However, there is a lifetime limit of $15,000.
If you’re in a governmental 457(b) plan, you can defer up to an additional $6,000 if you’re age 50 or older. But this catch-up is not available if you’re in a 457(b) plan sponsored by a tax-exempt employer like a hospital.
Both types of 457(b) plans may allow you to defer an even higher catch-up amount in your last three years before retirement. For those three years, your additional catch-up amount could be as high as the normal deferral limit. For example, you may be able to defer as much as $41,000 ($20,500 + $20,500 catch-up) in 2022 – a real windfall. However, this three-year catch-up really is a true “catch-up,” meaning that it only works if you haven’t contributed the maximum in prior years. Also, you can’t use both the three-year catch up and the age 50 catch-up in the same year.