Gateway Financial Partners

Knock, Knock. Who’s There? It’s AARP (and Your Over-50 Catch-Up Contributions)

I turned 50 last year.  I wasn’t really happy about it, but it hasn’t been as bad as I thought it might be.  A few more hairs showing up where they aren’t supposed to be and a few less hairs where they actually are supposed to be, but that’s been happening for a while now.  Like since college.  So what really changes at age 50?  Only two things I have found so far – you get to join AARP and you can start making over-50 catch-up contributions to your 401k.

If you are fortunate enough to be in the position to max out your 401k, the catch-up contributions can be a big deal.  They allow you to put more away for that retirement which isn’t as far away as it used to be, and it also allows you to increase one of the few federal income tax deductions that many high earners have left.  But the execution of this special contribution can be problematic, and I have come across many clients who think they are taking advantage of it, but actually aren’t.

The maximum 401k contribution for most people this year is $23,000, but the over-50 catch-up contribution allows for an additional $7,500 for a total of $30,500 of potential employee contributions.  The mistake I have seen many people make is that they just increase their 401k contribution percentage, like they probably have done several times over their career.  It seems logical that this would lead to higher contributions.  However, in many cases, the HR/payroll department will still cap contributions at the same $23,000 max, so all you have done by increasing your contributions is to hit the same cap earlier in the year!

To make sure this doesn’t happen to you, you need to contact your HR/payroll department and make a specific benefit election for the catch-up contribution.  Often, this will be a separate contribution with its own line on your paystub that runs concurrently with your normal 401k contributions.  It isn’t necessarily something that happens after the normal contributions max out!  If this is confusing, reach out to me so I can help you sort this out.  We might as well take full advantage of one of the only upsides of being a half-century old!


About the Author

Neil Manning
Neil Manning CFP, AIF, CDFA, FSA - LPL Financial Advisor
I am a reformed actuary turned financial advisor, helping my clients with everything from investments to retirement projections to LTC insurance since 2014.  Unlike most normal people, I love numbers and finance – I’m currently reading a book about game theory which my wife and two teenage daughters think is unbelievably boring (they are wrong).  For more details about my background, check out my website below.
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