There are many things that we don’t look forward to about getting older every year, but not everything about getting older is bad. When you turn 16 you get your driver’s license, when you turn 18 you get to vote, when you turn 21 you can drink, and when you turn 50 you can save more money! Maybe this isn’t as exciting as some of the other age milestones, but once you reach age 50 you can begin making catch-up contributions into your qualified retirement accounts.
There are many different ways that employees and employers can contribute to their retirement plans, however the government does impose limitations on the maximum amount that is allowed to be contributed each year and it differs based on the type of retirement plan and the tax year. Many retirement plans allow these catch-up contributions once you turn 50 years old. Catch-up contributions basically increase the annual contribution limit allowing you to save even more for retirement.
How Does it Work?
As mentioned, you can begin making catch-up contributions to qualified retirement accounts in the year that you turn 50. These can be made to almost all retirement plans including: a traditional IRA, Roth IRA, SIMPLE IRA, SIMPLE 401(k), SARSEP, 401(k), 403(b), or 457. For 2022 the contribution limits are as follows:
- Traditional and Roth IRA accounts have a $6,000 annual limit with a $1,000 catch-up contribution.
- SIMPLE IRA and SIMPLE 401(k) accounts have a $14,000 annual limit with a $3,000 catch-up contribution.
- 401(k), 403(b), and 457 accounts have a $20,500 annual limit with a $6,500 catch-up contribution.
What is the Purpose?
Many people do not realize the importance of saving for retirement early and as they get closer to retirement age, you may realize you have not saved as much as you will need. The basic idea of allowing people to make catch-up contributions is to make up for the years that you were not saving enough when you were younger. As we know, people typically earn more as they advance in their career which is why the catch-up contributions start later in your working life. If you have the means to do so, it can be very advantageous to fully maximize your contributions in order to put yourself in the optimal position for retirement. Maxing out your contributions and taking advantage of the catch-up contribution now can help you get closer to your ideal retirement lifestyle even if you did not save as much when you were younger.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author and not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice.