Tax ARTICLE - Quantifying the Benefits of Making Those Extra Retirement Account Catch-up Contributions

The Economic Growth and Tax Relief Reconciliation Act of 2001 established the right to make additional catch-up contributions to certain types of tax-advantaged retirement accounts. For 2005, this opportunity is potentially available to individuals who will be age 50 or older as of year-end.

Specifically, additional elective deferral catch-up contributions can be made to 401(k), 403(b), 457, and SIMPLE salary reduction plans (assuming the plan in question allows said catch-up contributions). Catch-up contributions can also be made to traditional and Roth IRAs.

These contributions are above and beyond the "regular" annual elective deferral contribution limits that otherwise apply to salary reduction plans and the "regular" annual contribution limits that otherwise apply to IRAs.

Bottom Line: Individuals who will be at least 50 years old as of 12/31/05 are potentially eligible to make catch-up contributions for 2005 and for subsequent years as well. The following table shows maximum allowable catch-up contributions for 2005 and beyond [IRC Secs. 414(v) and 219(b)(5)].

Maximum Catch-up Contribution

If the you are married and both you and your spouse are age 50 or older, all the amounts shown above can potentially be doubled. Also, for salary reduction plans, inflation adjustments may kick in after 2006 in $500 increments [IRC Sec. 414(v)(2)(c)]. However, depending on participant salary levels and the terms of salary reduction plans, maximum allowed elective deferral catch-up contributions could be less than the indicated amounts.

Making Salary Reduction Catch-up Contributions. Assume you turn 50 during 2005 and make the maximum $4,000 elective deferral catch-up contribution allowed for this year and the maximum $5,000 contribution allowed for the subsequent 15 years after 2005 up to age 65. Here’s how much extra you could accumulate by that age in your 401(k), 403(b), or 457account, assuming the annual rates of return indicated below.

Making SIMPLE Plan Catch-up Contributions. Assume your turn 50 during 2005 and make the maximum $2,000 catch-up contribution allowed for this year and the maximum $2,500 contribution allowed for the subsequent 15 years after 2005 up to age 65. Here’s how much extra the you could accumulate by that age in your SIMPLE plan account, assuming the annual rates of return indicated below.

Making IRA Catch-up Contributions. Assume you turn 50 during 2005 and make the maximum $500 catch-up contribution allowed for this year and the maximum $1,000 contribution allowed for the subsequent 15 years after 2005 up to age 65. Here’s how much extra you could accumulate by that age in your IRA, assuming the annual rates of return indicated below.

The results certainly justify consideration of these valuable financial planning tools.

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