Need a Second Chance on Your Retirement Planning? All You Need to Know About Catch-Up Contributions
As financial advisors in Atlanta, we know how beneficial it can be to start planning for retirement early. We also know how difficult it can be to get started, especially when retirement seems so far away. This is where catch-up contributions can be a game-changer.
While it’s not recommended to rely on this strategy, because putting away more later on can be just as difficult as putting away a smaller amount earlier, catch-up contributions can give you a leg up on your retirement savings, especially if you got a late start.
What Are Catch-up Contributions?
In short, a catch-up contribution is an option that becomes available when an individual turns age 50, enabling them to save more than the previous annual contribution limit for money deposited to IRAs, 401(k)s and the like.
For example, the retirement contribution limit for a Traditional or Roth Individual Retirement Account (IRA) is $6,000 for those under age 50. That limit increases to $7,000 for an IRA account holder in the year of their 50th birthday, because they’re allotted an extra $1,000 catch-up contribution. A SIMPLE IRA or SIMPLE 401(k) allows for up to $3,000 in annual catch-up contributions. Annual catch-up contributions to a 401(k) and 403 (b) are $6,500 in 2021, and employees with at least 15 years of service may be able to make additional contributions.
Catch-up contributions are available for virtually all IRS-designated retirement vehicles. The higher contribution limits empower you to put more money into your retirement accounts, an essential step if you got a late start planning for retirement. Depending on your accounts, these contributions can also help with taxes, whether you’re making pre-tax or after-tax contributions.
So, How Much More Can I Contribute?
The amount you can contribute to your retirement plan is based on your retirement account type. The chart below shows how much you can save before the age of 50, and what that amount looks like after age 50 when you add your catch-up contributions.
Catch-up contributions can be a golden opportunity to stage a comeback in your savings.
But How Do I Make Bigger Contributions?
Putting money aside can be difficult at any stage of life. There’s always something you could use the money for, be it an extra expense, a trip you’ve been wanting to take, or a short-term goal like a child’s wedding.
With this in mind, it’s not always easy to prioritize savings, even if you’re earmarking the money to use later on. Manually transferring money into a savings account or retirement account can be even harder, because you may have to fight the temptation to use the money on something else with every contribution. This is when people start to think they can’t make the extra contribution, even though they probably can.
Making your savings automatic can help eliminate this struggle. When money is taken directly from your paycheck, you don’t have the chance to spend it. Sometimes you don’t even realize it’s gone. Moreover, the extra money saved is often tax-deductible, meaning that Uncle Sam will pick up part of the financial burden through income tax savings.
Talking to a financial advisor can also help. A financial advisor can help you focus upon your long-term goals and the importance of putting this money aside.
How Much Do I Need in Retirement?
The amount a person needs in retirement depends on many factors, from their income to their retirement personality. (What’s your retirement personality? Find out now.)
Your retirement personality will help establish how much you’ll spend in retirement, which in turn, will help you determine how much you should be saving. A financial advisor can help you calculate a comfortable amount based on your Social Security benefits, other retirement income and factors such as cost of living, expenses, taxes and even inflation. (For what to expect when retiring in Texas, Georgia or Alabama, check out our new guide: Retiring in the South.)
At Linscomb & Williams, we have 50 years of experience helping busy families plan for retirement. When there’s no plan in place and your savings are inefficient, you may need to lower your spending or change course. Sometimes this can mean having to postpone retirement.
The good news: A small increase in savings can boost your potential investment gains. But the longer you wait, the more difficult it can be.
Catch-Up Contributions Aren’t Just for Those Who Got a Late Start
While catch-up contributions can be a game-changer for those who missed out on early years of compound interest, they can also help make up for years like 2020, when many people had to stop retirement contributions either due to job loss or a cut in pay, or investment losses. Extra contributions can help in the event of a divorce, loss of a spouse or change in retirement goals.
Remember, at an 8 percent annual return, these extra contributions can boost your retirement savings considerably. Also, contributions to a Traditional IRA are made pre-tax, so these extra payments can reduce your income tax bill by $1,000 for the year. For other tax considerations when it comes to retirement, read our recent blog post: What You Likely Don’t Know About Taxes in Texas (and Georgia and Alabama).
How Linscomb & Williams Can Help
Catch-up contributions are pretty straight-forward, but these extra savings opportunities might not be your only option to help make up for lost time.
Retirement planning can be complicated. Our financial lives can be complex. If you’re not where you had hoped to be in terms of retirement, it’s not too late to make a plan. At Linscomb & Williams, we specialize in helping individuals and families reach their goals, regardless of their situations. Our clients are primarily executives, professionals and other high-earning individuals with specific needs. Don’t be afraid to ask for help. Schedule a no-obligation conversation with our team and get the conversation started.