Experts say it’s never too soon to begin saving for retirement. But what can you do if you know you started too late? While starting early is still the best way to save for retirement, thanks to the power of compounding interest, the Internal Revenue Service (IRS) has given those savers who got off to a late start some ways to catch up.

Age 50 Catch-Up Contributions

If you will be age 50 or over at the end of the calendar year, you can make annual catch-up contributions to many retirement plans. A catch-up contribution is the amount you can contribute to your plan in addition to IRS limits. How much that catch-up contribution can be is determined by your plan type, and it may change from year to year. The IRS website will have the most up-to-date amounts.

In calendar year 2020, the catch-up contribution allowed for Traditional and Roth IRAs is $1,000. The catch-up contribution must be made by the tax deadline, not including any extensions.

Other plans may choose to permit participants to make even more generous catch-up contributions of up to $6,500 in 2020, including:

  • 401(k)
  • 403(b)
  • SARSEP
  • Governmental 457(b)

Catch-up contributions to these employer-sponsored retirement plans (if permitted by the employer) must be made via elective deferral from wages prior to the end of the plan year.

Example

Terry is age 57. She has a Traditional IRA and also participates in her employer’s 457(b) program, which permits catch-up contributions. She may be eligible to make catch-up contributions to both accounts as follows:

Year

Program Type

IRS Annual Contribution Limit

Age 50 Catch-Up Amount

Total Contribution

2020

Traditional IRA

$6,000

$1,000

$7,000

2020

457(b) Program

$19,500

$6,500

$26,000

Special Catch-Up Contributions

If you are a participant in a 457(b) program, your plan may also allow another option. If you don’t contribute the maximum amount in a given year, you may be eligible to make special catch-up contributions as you near retirement. During the three-year period prior to the calendar year in which you reach normal retirement age (the earlier of age 65 or the age set by your employer, not to exceed 70½), you can contribute the lesser of:

  • Twice the normal contribution limit (in 2020 – $19,500 x 2 = $39,000); OR
  • The normal contribution limit + amounts allowed in prior years that you didn’t contribute

If your 457(b) plan allows both the regular age 50 catch-up contributions and the special catch-up contributions, you can use either, but not both in the same year.

Example

In 2017, Cara began planning for her retirement three years before reaching her normal retirement age (in 2020). She reviewed all past years for which she was eligible to participate in her employer’s 457(b) program (for Cara, that began in 2012) and calculated how much she could have contributed, but didn’t. In this example, the total amount of special catch-up contributions Cara can make is $30,000.

Year

IRS Annual
Contribution Limit

Actual Contribution
Cara Made

Underutilized Amount

2012

$17,000

$10,000

$7,000

2013

$17,500

$11,000

$6,500

2014

$17,500

$12,000

$5,500

2015

$18,000

$12,000

$6,000

2016

$18,000

$13,000

$5,000

Total Underutilized Amount from Previous Years

$30,000

Cara plans to make special catch-up contributions in 2017, 2018 and 2019, and has decided that she wants to contribute the maximum amount as a special catch-up contribution each year. Below is a chart that shows how much she can contribute each year:

Year

IRS Annual
Contribution Limit

Available Underutilized Amount from Previous Years

Maximum Amount Allowed, Including Special Catch-Up Amount
(lesser of 2x normal contribution limit OR normal contribution + underutilized amount from previous years)

Remaining Underutilized Amount

2017

$18,000

$30,000

$36,000
(2x normal contribution limit)

$12,000

2018

$18,500

$12,000

$30,500
(normal contribution limit +
remaining underutilized amount)

$0

2019

$19,000

$0

$19,000*

$0

*While no more underutilized amount remains for Cara to make a special catch-up contribution in this year, she is now eligible to make a regular age 50 catch-up contribution.