If you’re 50 or above, you can likely make extra “catch-up” contributions to your tax-favored retirement accounts. You might wonder if this is worth the trouble; the answer is “Yes!”
Here are the ground rules for getting started with catch-up contributions.
The lowdown on IRAs
Eligible taxpayers can make extra catch-up contributions of up to $1,000 every year to a traditional or Roth IRA. If, by December 31, 2023, you’re over 50 years of age, you can make a catch-up contribution for the 2023 tax year by April 15, 2024.
Additional deductible contributions to a traditional IRA can create tax savings, but your deduction may be limited if you or your spouse are covered by a retirement plan at your place of business and your annual income exceeds specific levels.
These additional contributions to Roth IRAs won’t create any up-front tax savings, but you can make federal-income-tax-free withdrawals once you’re older than 59½. There are also some income limitations on Roth contributions.
Individuals with higher incomes can make additional nondeductible traditional IRA contributions and benefit from the tax-deferred earnings advantage.
How company plans measure up
You must also be 50 or older to make extra salary-reduction catch-up contributions to your employer’s 401(k), 403(b), or 457 retirement plan, assuming these contributions are allowed and you signed up for them.
If this is the case, you’re permitted to make extra contributions of up to $7,500 to these accounts for the 2023 tax year. Check with your HR department to see how to get started with making additional contributions.
Salary-reduction contributions are subtracted from your taxable wages, so you’re essentially getting a federal income tax deduction. You can leverage the resulting tax savings to aid in paying for part of your catch-up contribution, or you can put these savings into a taxable retirement savings account to increase your retirement wealth in the future.
Run the numbers
Here’s an idea of just how much you can accumulate with catch-contributions.
IRAs
Let’s imagine you’re 50, and you contribute an additional $1,000 catch-up to your IRA this year, and then you continue to do so for the next 15 years. This is how much extra you could have in your IRA by age 65.
These estimates are rounded to the nearest $1,000.
| 4% Annual Return | 6% Annual Return | 8% Annual Return |
| $22,000 | $26,000 | $30,000 |
It’s essential to remember that making more significant deductible contributions to a traditional IRA can also reduce your tax bills. Making additional contributions to a Roth IRA will not give you this benefit, but you can withdraw more tax-free money later in life.
What about company plans?
Let’s say you’re turning 50 next year. If so, you can contribute an additional $7,500 to your company plan. If you do the same for the next 15 years, here’s how much more you could have in your 401(k), 403(b), or 457 plan account.
These estimates are rounded to the nearest $1,000.
| 4% Annual Return | 6% Annual Return | 8% Annual Return |
| $164,000 | $193,000 | $227,000 |
As with IRAs, making more significant contributions can also lower your tax bill.
Looking at both IRA and company plans
Lastly, let’s imagine you turn 50 next year. If you’re eligible, you contribute an additional $1,000 to your IRA for next year, and you make an additional $7,500 contribution to your company plan.
After that, you continue to do the same thing for the next 15 years. Here’s how much extra you could have in both accounts after that time.
These estimates are rounded to the nearest $1,000.
| 4% Annual Return | 6% Annual Return | 8% Annual Return |
| $186,000 | $219,000 | $257,000 |
Have questions? Smolin can help
Extra catch-up contributions can add up to some pretty big numbers by the time you retire. If your spouse can make them, too, you can potentially accumulate even more wealth for a comfortable retirement.
If you’re curious to know more about catch-up contributions, contact the team at Smolin, and we’ll answer all your questions.