IRS rules around retirement savings favor those who are over 50. Contributions above the normal limits are referred to as “catch-up” contributions.

Recently, a prospect came to our office for an initial consultation. Sally had read this column and was eager to enhance her retirement saving strategy. Sally sat down at our conference table and said, “Bill, one day I was 35. Then I was 50. I’ve watched the TV ads of couples sailing comfortably into retirement. Those ads were about ‘older’ people. Those older people are now me. I need to save more.”

Luckily for Sally, IRS rules around retirement savings favor those who are over 50. Contributions above the normal limits are referred to as “catch-up” contributions. In Sally’s case, she had lots of opportunity to save more.

The deadline for contributing to tax-advantaged accounts for 2018 has come and gone. How much or how little you’ve put into retirement savings – compared with what you “should have” – has little motivational value. What’s done is done. Far more productive would be to figure out how you can play catch-up in 2019.

The IRS has specific guidelines to help you catch-up, based on how you earn your money. But the guidelines must be followed carefully to avoid any taxes and penalties that come from exceeding the various limitations.

Here are some of the catch-up options:

1. It doesn’t matter how many IRAs you have; the limit is the same – The maximum combined total you can contribute to individual retirement accounts, or IRAs – whether Roth or traditional – is the lesser of 100 percent of your eligible income or $6,000 if you are under 50. If you will be at least 50 by the end of the year, you can set aside an additional $1,000 catch-up contribution.

2. If you have access to an employer-sponsored retirement plan, that contribution is independent of your IRAs – you can max out your workplace retirement plan without lessening how much you can contribute to IRAs. That amount is based on the compensation you received from that employer, and caps out at $19,000 unless the plan places lower limits. If you are 50 or over by the end of the year, you can make an additional $6,000 catch-up contribution. Workplace retirement plans may be 401(k)s, 403(b)s, most 457s and the government’s TSPs (Thrift Savings Plans).

3. If you have access to a Governmental 457(b) plan, you can defer salary in addition to what you defer under Roth and traditional IRAs – the maximum is the lesser of 100 percent of your eligible income or $19,000 if you are under 50. If you are aged 50 or older, special ‘catch-up’ contributions can reach as much as $38,000 per year (twice the annual limit) in the last three years prior to normal retirement age, if permitted by the plan.

4. If your employer plan allows after-tax contributions to its workplace retirement plan, or if you are self-employed with a SEP IRA or Solo 401(k), you can save more – the overall limit is $56,000.

5. If you work for more than one employer and each offers a defined contribution plan, you could accumulate up to the $56,000 for each employer if the companies do not share ownership. Two employers could equal a $112,000 maximum. Suppose Sally worked for a corporation and makes her maximum salary deferral contributions to her 401(k) of $19,000 plus the $6,000 catch-up contribution. Her employer kicks in another $31,000, bringing her to the $56,000 limit. Sally also makes $300,000 running a landscape architect business. There is no common ownership or relationship between her business and the corporation she is an employee for. Sally can establish a 401(k), SEP IRA, or profit-sharing plan for the landscaping architect business. She can contribute up to $56,000 under that plan. Sally’s total contribution for the year could be up to $112,000.

The one word of caution is that IRS regulations are complex, especially when combining more than one plan. Eligibility rules, limits and exceptions abound. The cost of making a mistake are high. You may just decide that a good first investment would be in a qualified financial advisor who can steer you along the safest – and most profitable – catch-up path.

The best way to catch up on retirement savings is by knowing the rules, taking advantage of any employer plans and maximizing IRA contributions. Assuming you qualify, explore every catch-up option offered to those age 50 and older.

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