How to catch-up on retirement savings at age 50 or older

Shelly Gigante

By Shelly Gigante
Shelly Gigante specializes in personal finance issues. Her work has appeared in a variety of publications and news websites.
Posted on Dec 11, 2019

If you are nearing retirement and have fallen short of your savings goal, it is not too late to play catch up with your finances. In fact, the federal government wants to help.

The Internal Revenue Service allows individuals who are age 50 or older by the end of the calendar year to make extra pre-tax contributions to their work-sponsored retirement plan account(s), including their 401(k), 403(b), Salary Reduction Simplified Employee Pension Plan, or governmental 457(b).

For 2019, the catch-up contribution limit is $6,000 on top of the $19,000 pre-tax limit for all savers. For 2020, the catch-up is $6,500 on top of the $19,500 pre-tax limit for all savers.

In 2019 and 2020, those 50 and older can save an additional $1,000 to their traditional or Roth IRA, as well, above and beyond the baseline $6,000 annual limit for all eligible workers. (Calculator: What will my income be in retirement )

SIMPLE IRA, or SIMPLE 401(k), plans may also permit catch-up contributions up to $3,000 in 2019 and 2020, on top of the $13,000 limit ($13,500 for 2020) for younger workers.

And finally, employees with at least 15 years of service may be eligible to make additional contributions to their 403(b) plan beyond the regular catch-up for those ages 50 and older. Also known as a tax-sheltered annuity (TSA) plan, a 403(b) is a retirement plan for some employees of public schools, employees of certain tax-exempt organizations, and certain ministers.

“Catch-up contributions are one of the most attractive means of saving for retirement,” said Melissa Labant, director of tax policy and advocacy for the American Institute of CPAs in Washington, D.C. “I don’t think most people are aware it exists.”

Indeed, the Employee Benefit Research Institute reports only about 16 percent of participants in Vanguard 401(k) retirement plans that offer catch-up contributions took advantage of the perk in 2014, the most recent year for which data are available. (Employers that sponsor 401(k) plans are not required to offer catch-up contributions, but a majority of them do.)

A few thousand dollars in annual pre-tax retirement savings may not sound like much, but it has the potential to accumulate quickly with the magic of compounded growth, said Labant. That can help to mitigate longevity risk, a serious threat to many baby boomers.

A 2016 GOBankingRates survey of 4,500 adults in all age groups found one in three (33 percent) Americans has zero saved for retirement. Fully 75 percent of those over age 40 say they are behind on their retirement savings, and three in 10 of respondents age 55 and older have nothing socked away.1

“It’s never too late to start saving,” said Labant.

A 50-year-old earning $75,000 per year with no prior retirement savings, for example, could potentially generate monthly retirement income of $1,462 by maxing out their 401(k) annually until their full retirement age of 67. They would generate an additional $487 monthly by making catch-up contributions during those years, assuming a hypothetical 7 percent average annual rate of return.

Catch-up contributions yield another potential benefit as well, said Labant. They lower your taxable income in the year you contribute, which may render you eligible for deductions that were phased out at the higher income threshold, she said.

“Deferring that income could be advantageous because you are most likely in a higher tax bracket while working than when you retire,” said Labant.

Coming up with the cash to make extra contributions may be easier than you think.

Those nearing retirement are often in their peak earnings years and may have fewer demands on their income—their kids are finishing college and their mortgage may be paid. They may also be able to pay down debt and reduce their monthly spending to help stretch their retirement savings. ( Calculator: How much should I save for my retirement? )

By saving a bigger piece of their income pie in the years leading up to retirement, those age 50 and older can help make up for lost time.

To further ensure a comfortable retirement, they may also wish to delay Social Security when they reach retirement age to boost their future financial benefit.

“Save as much as you can as early as you can, but if you haven’t saved enough don’t forgo this opportunity,” said Labant. “Check with your employer to see if they allow catch-up contributions and if so take advantage.”

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1 GoBankingRates, “How Much Americans have Saved for Retirement,” 2016.

The information provided is not written or intended as specific tax or legal advice. MassMutual, its employees and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own, and do not necessarily represent the views of Massachusetts Mutual Life Insurance Company.