Don't you love catching up? Whether it's reconnecting with friends and family members or just getting where you need to be after running behind, catching up feels good. For investors nearing retirement, catch-up contributions - allowed by the IRS - can potentially make the difference between an uncertain financial future and a comfortable retirement. What are catch-up contributions? Catch-up contributions are the additional amounts savers age 50 and older can contribute to tax-advantaged retirement accounts each year, beyond the plan’s standard limit. While these amounts generally adjust each year, in 2024 investors age 50 and over can contribute an extra:
The benefits can add up fast Catch-up contributions help retirement savers make up for the years they didn’t save enough, while providing the same tax advantages as regular account contributions. The ability to contribute more money on a pre-tax basis can help lower your current taxable income even further. And since earnings in both traditional and Roth accounts grow tax-deferred, that money has the potential to grow faster over time than in a comparable taxable account. For example, a 50-year-old 401(k) plan participant who plans to retire at 67 has 17 years to save for retirement. By investing $23,000 a year (the standard contribution limit for 2024) at a 7% average annual rate of return for 17 years would result in an account value of $750,000. (That doesn’t include any matching contributions from employers.) If the same investor took advantage of catch-up contributions to invest the maximum $30,500 annually, with the same rate of return, the account value would be approximately $993,000 in 17 years, for a difference of $243,000. Only $127,500 of that is attributed to catch-up contributions. The remainder is from account earnings.1 Keep in mind, market conditions and plan contribution limits are subject to change over time, so actual performance results will differ and may be more or less than indicated in this hypothetical example.* Higher earners may want to take advantage of opportunities to help lower their tax burdens by making pre-tax catch-up contributions in 2024 and 2025. That’s because a new rule will require catch-up contributions to be made on an after-tax basis to a Roth account for anyone with annual earnings of $145,000 or more, beginning in 2026. However, keep in mind, as long as certain criteria are met, Roth account distributions are tax-free in retirement. To learn more about moving closer to your retirement goals, call the office to schedule a time to talk. 1)Hagen, Kailey, “Using 401(k) Catch-Up Contributions to Increase Your Savings.” Fool.com, 5 FEB 2024, https://www.fool.com/retirement/plans/401k/catch-up-contribution/. |
Benefits of Catch-Up Contributions
