Is it Time for a Catch-Up Contribution?

by Investing School on August 15, 2012

When you open an IRA late, don’t have the funds to contribute enough during your family raising years, or for some other reason find yourself short as retirement approaches, a catch-up contribution can make all the difference. If you are over the age of 50 you can make additional contributions to your 401(k) or other individual retirement account.

The provision for such contributions was created by the Economic Growth and Tax Relief Reconciliation Act of 2001. The goal is to offer older individuals the opportunity to set aside enough money for their upcoming retirement. Catch-up contributions were supposed to end in 2011 but the Pension Protection Act of 2006 extended the plan permanently.

It is interesting to note that research indicates that only 13% of those eligible make use of the catch-up policy. That is even though under some circumstances the additional contributions are treated just like regular contributions for tax purposes. This is managed by taking an elective deferral on the interest earned.

To be able to make catch-up contributions you must have an appropriate savings plan. You can exceed the limit placed on regular contributions for the year up to a certain amount. This limit is periodically adjusted based upon the cost of living, and that information is made available to the public so that people know in advance how much they can contribute each year. Counseling may be made available to employees so they can manage their finances appropriately.

The contributions made through the catch-up plan are taxed when withdrawn, just like other retirement savings. There are many ways to reduce tax liability upon retirement and a tax specialist is the right person to provide advice on how to maximize your retirement income.

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