For anyone in the 50 and over crowd, or approaching 50 this year, there is an opportunity to make retirement contributions that exceed the regular contribution limits. This is known as a catch up contribution. Catch up contributions are like an extra boost for those nearing the end of the race and getting ready for retirement. Taking advantage of the catch up contribution will help you make up for any lost savings and reap the tax benefits that IRAs have to offer. While every plan is different and there are limitations placed on your catch-up contribution, you won’t regret making the most of this extra saving room – especially in a self directed IRA.

What is the Purpose of Catch-Up Contributions?

Simply put, the purpose of a catch-up contribution is to “catch-up” and maximize the value of your retirement funds before you leave the workforce. Even those who have sizeable retirement accounts will still benefit from the tax savings allowed under catch up contributions, which includes tax deductions as well deferring tax liability on any gains within the retirement plan.

Anyone turning 50 this year or has already turned 50 is eligible for a catch-up contribution towards their retirement plan. Catch-up contributions will increase your contribution limit for greater saving potential for your retirement years.  More importantly, these additional contributions will help those who need to compensate for any deficits or losses within their retirement savings.

Which Retirement Plans Allow Catch-up Contributions?

Catch-up contributions are possible within 401(k), 403(b), SARSEP, and governmental 457(b) plans as well as self directed IRA plans. You can self direct a Traditional IRA, Roth IRA, SEP IRA or SIMPLE IRA to maximize  contributions as well as growth. Elective deferrals, are not considered catch-up contributions, unless they are in excess of $18,000 (for 2015) or if they exceed the ADP test maximum amount, or the plan’s maximum amount (if applicable). Employer-sponsored retirement savings plans all differ with regards to whether or not they permit catch-up contributions. If you are trying to maximize an employer sponsored plan i.e. 401(k), 403(b)… Inquire with your employer about the limitations, matching and catch-up contribution potential for your workplace sponsored plan.

What Are the Catch-Up Contribution Limits?

Catch-up contribution amounts vary based on the tax year in which you are contributing and the specific retirement plan that you participate in.  Both Traditional IRAs and Roth IRAs are eligible for catch-up contributions up to $1,000 for 2014 and 2015. This takes a normal IRA contribution of $5,500 up to a maximum of $6,500. Any catch-up contributions (to either a traditional or Roth IRA) must be completed prior to your tax return deadline (excluding any applicable extensions). Participants of the a SIMPLE 401(k) or SIMPLE IRA plan are allowed catch-up contributions up to $3,000 for 2015 and up to $2,500 in 2014. Contributions that are a result of salary reductions in the SIMPLE IRA plan are not considered catch-up contributions, unless they are in excess of $12,500 in 2015 or $12,000 for 2014. SEP IRAs do not have catch-up contributions because the contributions are made by the employer, not the employee.

Catch-up contributions up to $5,500 in 2014 ($6,000 in 2015) may be permitted by these plans:
401(k) (other than a SIMPLE 401(k))
403(b)
SARSEP
governmental 457(b)

What is The Penalty for Excess IRA Contributions?

These catch-up contributions are designed to allow you to catch up on any missed contributions, and therefore you will not be subject to any penalties for these additional amounts. However, all IRAs have specific guidelines and limits to avoid incurring penalty taxes. It’s important to remain within these limits, otherwise any excess contribution amounts will be taxed at a rate of 6%. As long as you contribute the permissible amounts each year, you will only receive the benefits of your IRAs, such as lowered taxes and financial growth, without the inconvenience of the added 6% penalty.

If You Turn 50 Late in the Year You Are Still Eligible

Even if you turn 50 in December of a specific year, you are still eligible for catch-up contributions for that calendar year. For example, if you turned 50 in December of 2014, you are eligible to make a catch-up contribution for 2014 (as long as it’s before April 15th, 2015). You can then continue to take advantage of catch-up contributions each year thereafter.

For additional information on IRA catch-up contributions visit:

http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-Catch-Up-Contributions