The Ultimate Catch Up Contribution

Nick Hopwood, CFP® | June 14, 2017

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In the post-pension world, we need to take full advantage of the retirement plans offered by our employers. If you work for certain tax-exempt organizations such as a hospital, university, or state/local government, you may be eligible for the mother of all catch-up contributions. If you’re over age 50, your annual contribution could approach $48,000 plus any applicable match. Let’s explore how we approach that limit.

Stack the Plans

First, we start with the 403(b), where employees are eligible for up to $18,000 plus a $6,000 catch up contribution for a total of $24,000. Next, we move on to the 457. The 403(b) and 457 are stackable – meaning you can contribute to both without affecting the other plan. The same rules apply for the 457 – up to $18,000 or $24,000 if you are over age 50. And there you have it. Voila, $48,000 in employee deferrals per year. (For more from this author, see: Why Some Retirees Should Consider Roth Conversions.)

Let’s explore the significance of this and how we can take advantage. The first point to drive home is the sheer dollar amount. Do you realize this is more than double of what most people in the U.S. can legally contribute each year? Please keep in mind the maximum contribution for 401(k) plans is $18,000 or $24,000, depending on your age. Also, IRA/Roth IRA limits are $5,500 or $6,500 per year, depending on your age. By contributing up to $48,000 per year with tax benefits, you are setting yourself up for a high probability for success.

It Gets Better

Most people who can afford to save $24,000 or $48,000 per year are ineligible for a Roth IRA because chances are they earn too much (single filers threshold is $118,000-$133,000 and married filing jointly threshold is $186,000-$196,000). The good news is more and more plans are allowing for Roth contributions to the company retirement plans, which are not subject to those earnings limits. In fact, many 403(b) and 457 plans now have a Roth option, which means all $48,000 could be contributed to your Roth each year.

An Example

Dr Sickmore earns $400,000 while working at the university hospital. Dr Sickmore has two goals – saving as much for retirement as possible as well as getting as much into his Roth as possible. Dr Sickmore elects to contribute to the 403(b) Roth for $24,000 and the 457 Roth for $24,000. The university also matches the 403(b) following their formula. In total, Dr Sickmore adds $48,000 to his Roth retirement plan, plus the match.

If Dr Sickmore were looking for a more balanced tax approach, he could also could consider adding to one plan pre tax and the other Roth, which would allow him to split the tax benefits between now and later. Let’s examine further, Even if he only were able to put $24,000 in a Roth, he is still better off than 99% of America because he would still have $24,000 pre tax.

Conclusion

If you work at an organization which has a combination 401/403/457, consider evaluating if your benefits are “stackable.” This means you are able to contribute simultaneously and independently, allowing for you to hit the max on both at the same time. (For more from this author, see: Why a 10% Deferral to Your 401(k) May Not Be Enough.)

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