How
do I know if I can use the catch-up provision and how far back can I go?
Most retirement plans offer catch-up provisions that allow those
nearing retirement to contribute more money than other participants. Check with
your district to see if your plan has catch-up provisions.
Many educators reach their peak-earning years just before
retirement. In addition, major expenses such as a mortgage or paying for
children’s college education may be behind you. Catch-up contributions allow
you to take advantage of your improved financial status to save more for a
secure retirement.
There are different types of catch-up contributions:
• One that applies broadly to 403(b) and 457 plans allows
participants age 50 and over to contribute an additional $5,500 annually above
the standard $16,500 contribution limit for younger workers, for a total of $22,000
annually.*
• If you participate in a 403(b) plan and have 15 or more years
of full-time service, you may be able to contribute up to an additional $3,000
for five years, or a maximum of $15,000. Amounts above the basic $16,500
contribution limit are allocated first to the 15-year catch-up election and
then to the age 50+ catch-up contributions.*
• If you participate in a 457 plan, you may be eligible to
defer up to two times the contribution limit in effect for the final three
years of service. For example, since the contribution limit is $16,500 this
year, you could contribute up to $33,000 during your final three years of
service. You cannot participate in the three-year catch-up and the age 50+
catch-up during the same tax year.*
Using catch-up provisions (if your plan offers them) can help you
build a nice cushion into your nest egg. For example, let’s assume you have a
403(b), you’ve reached 15 years of service at age 48, and plan to retire at age
63. At ages 48 and 49, if you are eligible, you can contribute an extra $3,000
each year (15-year rule), when you are ages 50 to 52, you can contribute an
extra $8,500 each year (15-year rule plus age 50+ rule) and at ages 53 through
62, you can contribute an extra $5,500 each year (age 50+ rule; in this
example, you have exhausted the 15-year catch-up provision). If your
investments earn an average annual return of 5%, you will have nearly $130,000
more when you retire – just from catch-up contributions!**
Tip: Rather than waiting until
you’re closer to retirement, you may want to take advantage of the 15-year rule
as soon as you reach 15 years of service in order to allow for long-term
compounding of your returns.
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