Saving for retirement is a crucial aspect of financial planning, but sometimes life gets in the way and we may not save as much as we should. This is where catch-up contributions come in handy. If you're 50 or older, catch-up contributions allow you to save more in your retirement accounts than the usual annual limits set by the IRS.
This is especially helpful if you didn't save enough during your younger years. However, it's important to understand the caps for catch-up contributions depending on the type of retirement account you have. To develop the best retirement strategy for your needs, it's wise to consult a financial advisor.
Rates and Caps for Catch-Up Contributions
Allowable catch-up contributions to qualified retirement plans are annually established by the Internal Revenue Service. To make catch-up contributions, you must first have reached your plan's contribution maximum. We've outlined the maximum annual contribution limits and catch-up contribution thresholds for each plan in 2023 below.
The Benefits of Catch-Up Contributions
For many retirement accounts, the catch-up contribution limit is rather high. To see how much you could save by making the catch-up contribution, use a 401(k) calculator.
With a 7% return per year, a 401(k) account of a 50-year-old person who maxes out this year may be worth $20,865 at the end of the following year. If the entire catch-up payment is made, however, the total amount would increase to $27,820.
You can even come out ahead if your company provides a matching contribution. Maximum deductible contributions to all qualified retirement plans in 2023 are $66,000 or $73,500 if you're 50 or older. If you're 50 or older, your annual IRA contribution limit (including Roth contributions) is $7,500.
Making Catch-Up Contributions
Extra payments can be made by contacting the plan's administrator or logging into your account online. You have the flexibility to make this choice at any moment and modify your desired contribution amount on a pay period-by-pay period basis. Prior to the end of the year, catch-up payments must be made to 401(k) plans.
Unlike regular IRA contributions, catch-up contributions can be made until the income tax return filing deadline, which usually falls in mid-April of the following year. Hence, for the year 2022, you have the opportunity to make catch-up contributions to your IRA account until mid-April 2023.
You should maximize your retirement savings by making the most of catch-up contributions and other possibilities. If you have saved any money, it's important that you don't risk losing it all by making poor investment decisions. In general, lowering your risk exposure is a good idea as you age. But the crucial questions are by how much and how. To ease the transition from saving to spending, a financial counselor can be invaluable.
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