If you’re reading this, chances are you are open to looking for ways to increase your retirement nest egg. The basic principle is simple. The more money you have saved for your retirement years, the more you will have to spend and live off of once you’re finished working. One way to potentially increase your retirement savings is to take advantage of the “catch-up contribution.” Made possible by the Internal Revenue Service (IRS), this type of contribution gives you the ability to save just a little bit more once you’ve hit the age of 50.
Also, those of you who are age 50 and older, you’re allowed to contribute even more to certain types of tax-favored retirement accounts. The reality is that many people will need these “catch-up” contributions to be able to stash away enough money for retirement. This is because a large number of Americans are way behind when it comes to achieving financial security. However, adding just a bit more money to those accounts could potentially make a significant difference in your retirement nest egg. Here are the numbers.
If you are 50 plus, it is time to supercharge your retirement. Catch up contributions can help you do this faster and easier. At least in a less taxing manner.
Traditional IRA or Roth IRA Catch Up Contributions
If you are using a traditional IRA, you may get a tax deduction for your contributions. This can make it even easier to save a bit more money. On the other hand, if you are utilizing a Roth IRA, you won’t get any up-front tax savings, but you will have the ability to make a tax-free withdrawal later. Lastly, you can potentially contribute an additional $1,000 per year into either of these accounts as a catch-up contribution.
Catch-up Contributions to 401(k) Plans
If you’re lucky enough to have a 401(k) plan at work, you can make extra salary-reduction contributions up to $6,000 per year. This means you can potentially contribute $24,500 for 2018. Perhaps more important, you won’t have to pay the federal income tax on this income, which can help make saving a bit easier on the budget. Contributions are made pre-tax. Small business owners can potentially put away a whopping $61,000 into a solo 401(k).
Maximum catch-up contributions are:
- Traditional and Roth IRAs: $1,000
- 401(k), 403(b) and 457 plans: $6,000
What does this mean for your Retirement?
Don’t fall into the trap of underestimating how much these extra contributions can potentially benefit your upcoming retirement. Let’s take a look at a few examples in hard dollars (and sense) of what this money could mean for you.
Catch-up Contribution via IRA
For this example, let’s assume you are 50-years-old and put an extra $1,000 per year into your IRA through age 67 (67 is most likely your estimated retirement age, according to Social Security). Here is how much you could potentially accumulate in your IRA by retirement based solely on the “catch-up contribution.” I rounded to the nearest $1,000 to make it cleaner.
5% annual return: $26,000
7% annual return: $31,000
10% annual return: $41,000
Don’t forget you’re lowering your tax bill with these contributions. Would you rather write a check to your IRA or to the IRS?
The Numbers are Bigger for Employer-Sponsored Plans:
Using the same assumption above, the following figures are what you could expect to have if you saved the maximum “catch-up” contribution of $6,000 per year.
5% annual return: $155,000
7% annual return: $185,000
10% annual return: $243,000
A 10-percent annual return of $243,000 could translate into more than $12,000, per year, in additional retirement income. Extra money that many retirees will need considering how little they have saved for retirement.
Another important thing to note is that while you may be improving the security of your retirement with these contributions, you will also be lowering your current taxes. WIN WIN.
Doubling Up: You can potentially Catch up to Both IRA’s and 401(k) in the same year.
Saving the maximum amount allowed by both types of accounts could potentially allow you to sock away an additional $7,000 per year. Sounds good to me.
What to do now:
Sit down with a trusted financial planner to determine how much you need to be saving, on an annual basis, to reach your various financial goals. The sooner you get on track, the better those scary numbers will hopefully look. Not everyone will be able to, or even need to, max out their retirement accounts. That being said, even small increases in your saving rate and investment returns could potentially be the difference between reaching your financial goals and running out of money later.
This article was written by David Rae from Forbes and was legally licensed by AdvisorStream through the NewsCred publisher network.