This week, Gail explains a simple boost for your retirement nest egg — just for the over-50 crowd.

Gail —

My wife has a 403(b) at her place of employment while I have a 457. Both plans appear to be identical in regard to contribution limits. Both also allow for an additional contribution of $4,000 once you become 50 years old.

Does this mean you can contribute the full $4,000 in the year you turn 50 or is it a pro-rated amount based on what month your birthday is in? In other words, if your birthday is in July, you can only put in $2,000?

My wife will not turn 50 until mid-June while I will turn 50 in late October. We want to contribute the maximum allowable every year until we retire.

Regards,

John

Dear John —

The additional retirement plan contribution you refer to is called a "catch-up contribution." It was introduced in the massive tax package passed back in 2001. The name comes from the fact that this provision is designed to help folks who are close to retirement (and who realize they haven’t been saving as much as they should have been) catch up.

When it included catch-up contributions in the legislation, Congress was specifically thinking of women who return to work after taking years to raise children, and then find themselves behind the curve when it comes to their retirement nest eggs. It’s also helpful for people who, because of other expenses, couldn’t afford to save the maximum allowed by their employer plans earlier in their careers and want to make up for lost time.

But if you can afford it and your company retirement plan allows it (a plan is not required to offer this), everyone age 50 and older ought to be taking advantage of catch-up contributions. In fact, Congress liked this idea so much they also added catch-up contributions to IRAs.

To answer your question, John, here’s an example of the I.R.S. keeping the rules blessedly simple: as long as you turn 50 some time during the year (even if it’s on December 31) you are eligible to contribute the full catch-up amount for that year.

Through 2006, the amounts you can contribute to company retirement plans — including catch-up contributions — increase on a predictable schedule. IRAs have a schedule of their own. In both cases, once these limits are hit, contribution amounts will continue to be increased based on inflation.

Employer-Sponsored Plan 2005 2006 2007 2008 2009
401(k), 403(b), 457
Regular Contribution Limit $14,000 $15,000 Indexed for inflation
Catch-Up Contribution (age 50+) $4,000 $5,000 Indexed for inflation
SIMPLE
Regular Contribution Limit $10,000 $10,000 Indexed for inflation
Catch-Up Contribution (age 50+) $2,000 $2,500 Indexed for inflation
IRA
Regular Contribution Limit $4,000 $4,000 $4,000 $5,000 Indexed for inflation
Catch-Up Contribution (age 50+) $500 $1,000 $1,000 $1,000 Indexed for inflation

To sum things up, John, since you both turn 50 this year, you and your wife can each contribute $18,000 to your company retirement plans.

If you’re in the 25-percent tax bracket, the extra $8,000 the two of you sock away in your plans will save you an additional $2,000 in federal income tax ($8,000 x 25 percent) this year.

Assuming you retire at age 66 and that extra $8,000 earns 8 percent a year over the next 16 years, you and your wife will end up with an additional $27,407 in your company retirement plans!

You’re smart to take advantage of this and lucky your plans offer it.

All the best,

Gail

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