If you’re approaching retirement and behind on your savings, you may have a powerful tool to help you get back on track. It’s called a catch-up contribution. As the name suggests, it’s an extra amount you can contribute to your 401(k) and IRA each year once you turn age 50. The IRS allows these extra contributions so you can accumulate more retirement assets in the last 10 to 15 years of your career.
Catch-up contributions are so powerful because they’re used in qualified, tax-deferred accounts. You don’t pay any taxes on your growth as long as the funds are inside the account. That could help your assets accumulate at a faster rate than they would inside a similar, taxable account.
Catch-up contributions can also help you save on taxes today. Like standard 401(k) contributions, your catch-up contributions are deducted from your check on a pretax basis. That means they reduce your taxable income, thus lowering your tax exposure.
Thinking about making catch-up contributions to your qualified plans? That could be a wise strategy. Below are a few tips to help you get started:
401(k) Catch-Up Contributions
In 2018 you can make a standard contribution of as much as $18,500 to your 401(k) plan. This is a $500 increase from the limit in 2017. Once you turn 50, however, you can contribute an additional $6,000 as a catch-up contribution. This brings your total allowable contribution to $24,500.1
Keep in mind that your plan must allow catch-up contributions in order for you to take advantage of this strategy. Most plans do, but some don’t because of restrictions on highly compensated employees or other rules. Your company’s benefits department should be able to tell you whether catch-up contributions are permissible.
IRA Catch-Up Contributions
You can also make a catch-up contribution to your IRA. In 2018 you can make a standard contribution of $5,500 to an individual retirement account (IRA). If you’re age 50 or older, however, you can also contribute an additional $1,000, bringing your total permitted contribution to $6,500.2
You can make catch-up contributions to either a traditional IRA or Roth IRA. You cannot make catch-up contributions to a SEP IRA if you’re the employer, but you can if you’re a participating employee.
Also, keep in mind that catch-up contributions are subject to the same income limitations as standard contributions. If you can’t contribute to a Roth or make tax-deductible contributions to a traditional IRA because your income is too high, you also won’t be able to take advantage of catch-up contributions.
How to Start Making Catch-Up Contributions
Ready to take advantage of catch-up contributions? The first step is to examine your budget and find areas to cut back so you have the funds to make the contributions. For most people, a $24,500 contribution to a 401(k) is a big chunk of their annual income. Make sure you have room in your budget to make the contributions and support your lifestyle.
Next, work with your company’s benefits department to increase your 401(k) contribution. You likely just need to fill out a form. The same is true with your IRA custodian. A financial professional can help you implement a catch-up strategy and show you how it will improve your financial stability in retirement.
Ready to catch up on your retirement savings? Let’s talk about it. Contact us today at Nicky Derouen Financial Services. We can help you analyze your needs and develop a plan. Let’s connect soon and start the conversation.
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