How do they work?
As you move closer to retirement, you become increasingly aware of how much money you have saved—and how much more you still need to save before you can stop working. In this process, you may find that you want to make catch-up contributions to your retirement fund.
Put simply, catch-up contributions are extra deposits that you're permitted to make in your retirement accounts at age 50 and beyond. These contributions are outside the typical retirement contribution limits. Here are the basics you need to know as you consider making catch-up contributions to your retirement plan.
What types of accounts allow for catch-up contributions?
Most standard retirement accounts allow account holders ages 50 and older to make extra contributions. Each type of plan has different limits, however.
- 401(k) plans allow catch-up contributions of up to $6,500 a year.
- 403(b) plans allow catch-up contributions of up to $6,500 a year. Those with more than 15 years of service may be able to contribute even more.
- Roth IRA plans allow catch-up contributions of up to $1,000 a year.
- SIMPLE IRA plans allow catch-up contributions of up to $3,000 a year.
All of these amounts are listed as of 2021. In the future, the IRS may make changes to the catch-up contribution limits, as they have done in the past.
Keep in mind that these limits are in addition to the regular, annual contribution limits. If you have a Roth IRA, for example, the regular contribution limit is $6,000. So, if you are also making catch-up contributions, you can contribute up to $7,000 a year.
How do you make catch-up contributions?
You invest your catch-up contributions just as you would the other funds you're adding to your retirement account. Just report them on your taxes at the end of the year.
If you have money taken out of your paycheck and invested in a 401(k) automatically, you'll need to meet with your employer's human resources department and make changes to your withholding plan. If you self-invest in a Roth IRA or other individual retirement plan, then simply deposit more into the account when you go to make your annual contributions.
How do you figure out how much to contribute?
The best way to calculate your ideal catch-up contributions is to work backward. Figure out what year you want to retire. Then, figure out how much money you want to have in your retirement accounts by that date. Subtract the amount you have saved already. You now have a rough idea of how much more you need to save for retirement—interest not considered. Divide that amount by the number of years you have left until retirement, and that's the amount you should be contributing each year.
An easier approach is to use a retirement calculator. If you enter an age 50 or older, these calculators will typically take catch-up contributions into account when telling you how much to invest.
Catch-up contributions help ensure you're able to save what you need for retirement, even if you were not able to save quite enough earlier in life. The limits tend to be quite high and allowing. Some quick calculations, perhaps with the help of an online calculator, can help you decide how much you should save from age 50 and beyond.
Equal Housing Lender