Tax law changes made way back in 2001 established the right to make additional catch-up contributions to certain types of tax-advantaged retirement accounts. For 2017, this opportunity is potentially available if you will be age 50 or older as of year-end.

Specifically, you can potentially make additional salary reduction catch-up contributions to a 401(k) plan, a 403(b) plan, a 457 plan, or a SIMPLE plan (assuming you participate in a plan that allows catch-up contributions). These contributions reduce your taxable income and therefore result in lower income tax bills. You also can make additional catch-up contributions to a traditional IRA (which may or may not be deductible depending on your circumstances) and to a Roth IRA. (Roth contributions are always nondeductible, but they can be a good idea if you expect higher tax rates in future years.)

These additional catch-up contributions are above and beyond the “normal” annual contribution limits that otherwise apply to your tax-advantaged retirement accounts. The maximum allowable catch-up contribution for 2017 is $6,000 for 401(k), 403(b), and 457 plans. It is $3,000 for SIMPLE plans and $1,000 for traditional and Roth IRAs. However, depending on your salary level and the terms of your salary reduction plan, maximum allowed catch-up contributions to the plan could be less than the amounts shown here.

How Much Can Catch-up Contributions Be Worth?

That’s a good question! The purpose of this letter is to answer the question and to illustrate the beneficial long-term impact of making catch-up contributions. Remember: allowable catch-up contributions are now much bigger than back in 2002 when they first became available. For example, the maximum catch-up contribution to a 401(k) account for 2002 was only $1,000 versus $6,000 for 2017. The maximum catch-up contribution to a traditional or Roth IRA for 2002 was only $500 versus $1,000 for 2017. Therefore, you should now give catch-up contributions more respect than you might have earlier. The following analysis proves the point.

Assume you turn 50 during 2017 and make the maximum catch-up contribution for this year and then do the same for the following 15 years, up to age 65. Here’s how much extra you could accumulate by that age in the various types of retirement accounts, assuming the indicated annual rates of return:

Type of Account Annual Catch-up Contribution 4% Rate of Return 6% 8%

401(k), 403(b), 6,000 131,000 154,000 182,000

or 457 plan

SIMPLE Plan 3,000 65,000 77,000 91,000

Traditional 1,000 22,000 26,000 30,000

or Roth IRA

The numbers prove that taking advantage of the opportunity to make additional annual catch-up contributions is not a trivial exercise. If your spouse can make catch-up contributions too, so much the better. Of course, the favorable impact is somewhat less than illustrated if you turned 50 before this year, but it’s generally still a good idea. Finally, if you are disciplined enough to save and invest the annual tax savings resulting from salary reduction contributions and any deductible IRA contributions, the dollars accumulated from making catch-up contributions could be even more than illustrated.

Please think about the extra retirement savings you could accumulate, and contact us if you have any questions or want additional information on how to make catch-up contributions.