Why you should make catch-up contributions to your retirement plan

Most of us are guilty of not contributing regularly to our retirement fund. So as we grow older, retirement feels like a fast-approaching deadline. Are my investments on track? Have I saved enough for retirement? Questions like this loom large especially if you are 50 or older.

If you are at least 50 years old and are wondering if you have stashed enough for your retirement fund or not, here’s the good news. Catch-up contributions enable you to make additional savings to your IRA and 401(k) as you near retirement.

Most of the people are either unaware of this provision or they think that they cannot afford it. Hence, they are unable to take advantage of it to boost their retirement savings.

Here’s what you need to know about catch-up contributions to make the most of them for your retired life:

What are the catch-up contribution amounts?

Like most of the tax-favored retirement accounts which have IRS limits on their contributions, there are certain limits on the catch-up contributions as well.

• If you own a Roth IRA or a traditional IRA, the amount which you can contribute if you are 50 years or older, increases by $1,000. The maximum limit for contribution for both these IRAs is $6,500 in 2017.

• If you have a 401(k) plan, you can usually contribute as much as $18,000 to your retirement plan in 2017.

• If you have a Simple IRA, you can generally contribute as much as $12,500 in 2017. If you are 50 years or older and your employer also allows catch-up contributions, your contribution limit raises by $3,000.

• If you are 50 years or older and your employer allows catch-up contributions, your limit is raised by $6,000. This holds true for a Roth 401(k) or Roth 403(b) as well. The total elective contribution limit in 2017 is $24,000.

• SEP IRAs don’t allow catch-up contributions. However, if you have a plan called SARSEP – a plan in which a small business employer contributes to your SEP IRA, you may be able to contribute an additional $6,000 in 2017. The contribution rules for these plans are complicated so it is better to consult an IRA advisor for a better understanding.

What are the advantages of catch-up contributions?

Here’s why you should not miss out on catch-up contributions:

• While taxes aren’t the primary reason for you to take advantage of catch-up contributions for your 401(k) plan, that incentive can help you save a lot of money. Employees can make a contribution of $18,000 per year to their 401(k) tax deferred. Those over the age of 50 can contribute an additional amount of $6,000. This brings the tax deferred income to $24,000 a year. Hence, the more you contribute and move in to a higher tax bracket, the more you can benefit from the catch-up contributions for your 401(k).

• Usually most employers provide some kind of match to your retirement plan such as a 401(k). For e.g., an employer may offer a match of up to 6% for employee contributions. While not every company practices the same policy when it comes to matching the catch-up contributions, a lot of companies do. As per the Plan Sponsor Council of America, catch-up contributions are permitted for 97.1% of all 401(k) plans and 36% of plans match the contributions.

• Also, the catch-up contributions for a Roth IRA allow the investors to boost their after-tax investment. The investors thus end up with a larger account balance in their retirement when they can withdraw the principal, earnings and interest tax-free. If you expect your tax rate to increase as you grow older, maximizing your catch-up contributions and your Roth IRA can be a perfect and cost-effective way for investing for your retirements.

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DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation for writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.