What is a Catch-up Contribution?
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You have had some financial highs and lows throughout your life. Sometimes you were able to make the maximum contribution to your 401(k) plan; at other times you needed to keep every dime in your paycheck to handle other, more urgent expenses. Luckily, you can make catch-up contributions to help your retirement savings.
Catch-up contributions is the ability for those 5o and over to make additional savings contributions to their 401(k) and/or individual retirement accounts. To be legally entitled to make catch-up contributions according to the Government’s Thrift Service Plan you must be:
- age 50 or older during the calendar year in which the catch-up contributions are made (even if you become age 50 on December 31 of that year)
- currently employed and in pay status
- Making regular contributions to a civilian or uniformed services TSP account (or both), and/or an equivalent employer plan (such as a 401(k), 403(b), or 408 plan), that will equal the maximum allowed by the Internal Revenue Service (IRS), which is $15,500 for 2008 and $16,500 for 2009.
According to the TSP Catch-up contributions are over and above the regular percentage of salary or dollar amount limits set by the Internal Revenue Service (IRS) and cannot exceed $5,000 for 2008 and $5,500 for 2009. These limits can change with inflation.
Like typical 401k contributions, the catch-up contributions are tax deferred investment. That means the money put towards this type of retirement investment does not require tax to be paid on it until the money is actually accessed. Additionally the dividend, interest, and capital gains earned on the money is not subject to taxes until disbursement. Therefore, they can compound nicely inside the 401k account.
