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 $6,000 annually above the standard $18,000 contribution limit for younger workers, for a total of $24,000 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 $18,000 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 $36,000 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 $9,000 each year (15-year rule plus age 50+ rule) and at ages 53 through 62, you can contribute an extra $6,000 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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