Approaching retirement? Worried you’re behind on your savings? There’s good news. You have a powerful tool, known as a catch-up contribution, at your disposal. As the name suggests, the catch-up contribution is designed to help you catch up on your retirement savings. It’s an extra amount that the IRS allows you to contribute to your qualified accounts once you turn 50.
Catch-up contributions are so effective because they help you add money to qualified, tax-deferred accounts, such as your 401(k) and IRA. You don’t pay taxes on growth as long as your funds stay inside the account. That tax deferral may help your assets grow at a faster rate than they would in a taxable account.
You can also use catch-up contributions to reduce your taxes today. Contributions to a traditional IRA are tax-deductible. Similarly, your 401(k) contributions are deducted pretax from your paycheck. That means the contributions reduce your taxable income, which in turn reduces 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:
Catch-Up Contributions to a 401(k)
In 2018 the standard contribution limit for a 401(k) is $18,500. This is a $500 increase from the limit in 2017. When 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 catch-up contributions to an IRA. The standard IRA contribution limit for IRAs in 2018 is $5,500. If you’re age 50 or older, however, you can 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. 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 start making catch-up contributions? For most people, a $24,500 contribution to a 401(k) is a big chunk of annual income. You may need to examine your budget and find areas to cut back so you can afford an increased contribution.
Next, contact your company’s benefits department to find out how 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 J. Harris Financial. We can help you analyze your needs and develop a plan. Let’s connect soon and start the conversation.
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