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Catching up on retirement contributions

Chris Farrell Jan 5, 2011

Question: I am retiring from state government (next Wednesday) at the age of 54. I have a good pension, a 401k, and a small 457. I plan to work another 10 to 15 years.

If I find another job offering a 401k, am I eligible, and what affect will that have on my existing retirement savings accounts? Will I qualify for that “catch up” option?

And let’s assume after working and contributing at a 2nd job for a few years, I’m able to find a 3rd job with a 401k. Can I invest via that one? Can I again use the “catch up” option? Jim, Grand Haven, MI

Answer: The most likely answer is yes. The reason for the qualification is that the law gives companies a great deal of leeway when it comes to their 401(k)s. For example, a company doesn’t have to offer the catch-up option with its 401(k), although almost all do. You’ll also come under the company rules for when you can start participating in the plan.

As for eligibility the basic rule is that plan participants 50 years and older can make catch-up contributions if they meet certain conditions. Their regular 401(k) contributions must pass one of these hurdles first: Hitting the annual deferral limit, the plan’s deferral limit, or the annual limit for highly compensated employees.

Now, if we play out your scenario you’ll probably run into a twist. The 401(k) rules require you to start taking minimum distributions by April 1 of the calendar year after turning age 70½. But you don’t have to take money out of your current plan if you’re still working. You will have to take at least your required minimum distribution from your old, inactive 401(k)s (and IRAs). .

By the way, there is no company match on the catch-up contributions. You’ll want to figure out whether it’s better to put the savings into the retirement plan, a taxable savings account or a Roth-IRA. You may end up with more financial flexibility in retirement funding either the savings account or the Roth.

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