Supplemental retirement accounts, or SRAs, work similar to other qualified retirement plans. You can deduct the contributions from your paycheck before taxes, and the funds in the account grow tax-free until you distribute them after 59 1/2. Employees make voluntary contributions that can't exceed the Internal Revenue Service's contribution limits. As of publication, the limit stands at $17,500, but you can contribute additional amounts after 15 years or service, or once you reach the age of 50.
The Basics of SRAs
SRAs enable employees to save more than they can with a basic employer-sponsored plan. The employer sets up the plan and available investments and you choose how much to contribute from you paycheck and control how the money is invested in the available investment options. Since you can contribute more than you can to an individual retirement account, you can realize a greater tax benefit in the short term, as well as save more for retirement.
If you have 15 years of service with the same eligible employer, you can increase contributions by a maximum of $3,000 a year until you've reached $15,000 in lifetime catch-up contributions. This means you can make up to $20,500 ($17,500 + $3,000) a year once you attain the 15-year employment mark. However, you can only qualify to make catch-up contributions if the average of your regular contributions was less than $5,000 a year during your prior years of employment.
Age 50+ Catch-Ups
Once you exhaust any 15-year service contributions or don't qualify, you can begin to make catch-up contributions based on reaching the age of 50. You have to turn 50 by the end of the plan year. Then, your annual contribution limit rises by $5,500 a year, or the amount of your pay above the regular maximum elective deferral limit. To qualify for the catch-up contributions, you must also make the maximum contribution to your regular retirement plan for the year.
Here's how your employer should allocate a maximum contribution of $23,000 if you qualify for both 15-year and age 50+ contributions. The first $17,500 is considered your regular contribution. The next $3,000 is applied as a 15-year catch-up, while the remaining $2,500 is classified as an age 50 catch-up contribution. If you have any questions about eligibility requirements or exact amounts you can contribute, contact your plan administrator. These calculations can get complicated, particularly if you qualify for both the 15-year and age 50+ catch-ups at the same time. In addition, some plans don't offer catch-up contributions.
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