Catch-Up Contributions

You can give your retirement savings a big boost with these extra contributions once you turn 50.

Even if you haven’t contributed the maximum allowable amount each year to your employer’s retirement savings plan or your individual retirement account (IRA), you can make up this difference, and then some.

That’s because once you turn 50, you’re entitled to make an additional annual catch-up contribution over and above whatever the normal ceiling is for the year. Better still, you can make these additional contributions and boost your account value even if you’ve always contributed every penny that the law has allowed. In this case, “catch-up” may not be the right adjective, even though that’s the official term. Maybe “go-ahead contribution” would be more accurate.

A Brief History Of Catching Up

Catch-up contributions were introduced by tax legislation in 2001 and took effect on January 1, 2002. They reflected Congress’s concern that baby boomers in general weren’t saving enough for retirement and that fewer and fewer of them were covered by a pension plan.

By design, eligibility to make catch-up contributions comes with very few strings attached. In fact, the only requirement is that you turn 50. There are no income restrictions. What’s more, if you turn 50 on December 31, you’re considered 50 for the whole year and eligible to contribute the full catch-up amount.

For 2010, the catch-up amount is $5,500 for most employer plans, $2,500 for a SIMPLE IRA, and $1,000 for a tax-deferred or Roth IRA. Even if you’re classified as a highly compensated employee (HCE) and can’t contribute the full $15,500 to a 401(k) or similar plan because of the rate at which lower-paid employees contribute, you can still make a full catch-up contribution.

However, you do need to confirm that your employer’s plan permits catch-up contributions. Most of them do, including more than 90% of 401(k) plans, but you should check with your employer to be sure.

How The Contributions Work

To make a catch-up contribution through your employer’s plan, get in touch with your plan administrator or human resources department and explain what you want to do. Typically, the additional amount is factored into the percentage that’s deducted from your salary or wages each pay period. But, if you haven’t already begun contributing, ask about how you can arrange to make your full catch-up amount. If you’re enrolled in a traditional 401(k) or 403(b) plan and your employer also offers a Roth 401(k) or 403(b), you might also consider using a Roth account for your catch-up contribution if you’re permitted to split your contributions.

Any money you add to an employer’s plan must be contributed by the end of the tax year. In the case of an IRA, however, you can make a catch-up contribution for 2009 as late as the date you file your tax return for the year, usually April 15. You can make your 2010 contribution any time in the year or as late as when you file your 2010 tax return. The only requirement is that your earned income is at least as much as the amount you contribute.

Ira Catch-Ups

IRAs offer some additional flexibility when you want to increase your retirement savings.

If you’re contributing to a Spousal IRA for your husband or wife who does not have earned income, you can make a catch-up contribution if your spouse is 50 or older. Your maximum contribution for 2009, and also for 2010, is either $11,000 if only one of you is 50 or older or $12,000 if you are both 50 or older. Remember, though, you can’t add more than $6,000 to either account for either year.

If you’re eligible to contribute to a Roth IRA, you can make a catch-up as well as regular contributions as long as you have earned income. That’s not the case with a traditional IRA, where no contributions of any kind are allowed after you turn 70 1/2.

Health Savings Catch-Ups

If you’re eligible to contribute to a health savings account (HSA) because you have a high deductible health plan (HDHP), and you’re at least 55 but not older than 65, you can make a catch-up contribution to your HSA. In 2010, you can add $1,000 in addition to the $3,050 you can contribute for individual coverage (or $6,150 for family coverage). Your spouse can also make a catch-up contribution but only if he or she is between 55 and 65 and has established a separate HSA.

If you’re in a position to take advantage of these catch-up opportunities, the extra money can make a big difference to your accumulated assets. But like many other tax provisions enacted in 2001, the retirement catch-ups are slated to expire at the end of 2012 unless Congress acts to continue them.