Financial planning tools and services to put you on the path to the future you want
Your guide to financial planning and retirement
Connect with peers and experts
Get to know the people behind the company and the mission behind the work
Offer financial wellness to the people at the heart of your business
May 10, 2023
Most of us are pretty stressed by the need to give our savings a big boost as we approach retirement. Guess what? There is actually a relatively little known retirement savings strategy that can really help: Catch up contributions.
Catch up contributions are the IRS’s way of making it easier for savers age 50 and up to tuck away enough retirement savings. You probably already know that there’s a limit to how much you’re allowed to save in tax-advantaged retirement account such as IRAs and 401(k)s. Well, once you reach age 50, you’re allowed to make additional “catch up” contributions over and above those annual contribution limits.
However, according to a Transamerica Center study, only 52% of workers know about catch up contributions. Time to learn about this strategy and start applying it to your retirement planning.
The contribution limits and annual catch up contribution allowance vary depending on the type of retirement savings account you own. However, if you are 50 or over and have both an IRA and a 401k, you can save an additional $7,500 in 2023 .
For 2023, the catch up contribution limits are as follows:
2023 401k: The 401(k) plan annual contribution limit is $22,500 in 2023 while the catch up contribution is $7,500. This means that if you are 50 or over, you can contribute a total of $30,000 into your 401(k) in 2023. (Your total contribution including employer-matching funds cannot exceed $66,000, or $73,500 if you are 50-plus. )
For 2023, the IRA annual contribution limit is $6,500 and the catch up IRA contribution is $1,000, allowing workers age 50 and over to contribute a total of $7,500 per year.
Note that the contribution limits for traditional IRAs and Roth IRAs overlap. In other words, if you are 50 or older you can contribute a total of $7,500 per year split however you want between traditional and Roth IRAs (assuming that you meet the income limits for contributing to a Roth account).
However, the limits between 401(k)s and IRAs do not overlap, so you can max out your contributions for both types of accounts in the same year.
According to a recent GOBankingRates survey, 29% of adults age 55 and up have no retirement savings whatsoever and another 15% have less than $10,000 saved.
However, don’t despair if you feel like you don’t have enough. Catch up contributions can make a real difference.
If you’re behind on your retirement savings, maxing out both your annual contribution and your catch up contribution may be enough to finance a secure and reasonably comfortable retirement.
Let’s say that you have just turned 50 and you have no retirement savings. However, turning 50 is a wake-up call for you, so you decide then and there to max out your retirement contributions to your 401(k) and Roth IRA.
For 2023, you could save a total of $29,000 per year into these two accounts without catch up contributions.
Now add in catch up contributions, and you can save a total of $37,500 per year of retirement savings.
Are you married? Double those amounts!
Sure, it is easy to see how beneficial it is to save at least as much as the IRS recommends. However, actually finding the money to save can be the real challenge.
To save more for retirement, you don’t need to find new sources of income, you just have to rethink your existing spending.
Explore 23 Big and Small Ways to Save More for Retirement.
Catch up contributions don’t just help you save more for retirement; they also help you reduce your tax bill. When you save money in a traditional IRA or 401(k), you’re not required to pay taxes on those contributions. That means you’re able to save more money into these accounts without impacting how much money you have left for other expenses.
Saving money in a Roth account also gets you a tax break, but in a different way. With Roth accounts, you don’t get a deduction on the money you contribute to the account, but when you take money out of the account you don’t have to pay taxes on it. If your retirement income is limited, being able to reduce your tax bill at that time may make a significant difference in your standard of living.
Reducing your taxable income in retirement may have other benefits than simply stretching your retirement income a bit further. For example, Social Security benefits become taxable if one half of your Social Security benefits plus your other taxable income exceeds certain limits. Since distributions from Roth IRAs are not taxable income, they don’t count towards this calculation. As a result, putting your annual IRA contribution into a Roth account may result in an even better tax deal than putting that money into a traditional IRA.
If you’re behind on saving for retirement, it’s even more important to have a good retirement savings plan and investment plan for that money.
Saving every month is hard. But it is harder when you don’t actually know if you are saving too little or too much.
You might want to start by figuring out how much YOU will need for YOUR retirement. (Don’t rely on averages that may or may not apply to you and your values and goals.) The NewRetirement Retirement Planner is the most detailed tool available online.
It is easy to use, but is designed to help you imagine your future and take the steps you need to take to make that future happy and secure.
Do it yourself retirement planning: easy, comprehensive, reliable
Take financial wellness into your own hands and do it yourself retirement planning: easy,
Share this post:
Here are 28 retirement investing tips from today’s greatest financial minds. Just one of these lessons might make your dream retirement a reality.
Worried about money? You’re probably in better shape than average! Compare your balance to the average cash, savings, home equity of others.
Saving for retirement takes discipline. However, when you are still working, creating a retirement investment plan can be relatively straightforward. The goal is to simply grow the money. But, when you retire, your investment goals become multi-faceted, layered, and it can seem downright complicated. You still want your money to grow, but you have a whole…
Our weekly newsletter full of inspiration, podcasts, trends and news.
© 2024 NewRetirement, Inc. All rights reserved.
Disclaimer: The content, calculators, and tools on NewRetirement.com are for informational and educational purposes
only and are not investment advice. They apply financial concepts in a general manner and include
hypotheticals based on information you provide. For retirement planning, you should consider other
assets, income, and investments such as equity in a home or savings accounts in addition to your
retirement savings in an IRA or qualified plan such as a 401(k). Among other things, NewRetirement
provides you with a way to estimate your future retirement income needs and assess the impact of
different scenarios on retirement income. NewRetirement Planner and PlannerPlus are tools that
individuals can use on their own behalf to help think through their future plans, but should not be
acted upon as a complete financial plan. We strongly recommend that you seek the advice of a financial
services professional who has a fiduciary relationship with you before making any type of investment or
significant financial decision. NewRetirement strives to keep its information and tools accurate and up
to date. The information presented is based on objective analysis, but it may not be the same that you
find on a particular financial institution, service provider or specific product's site. All content,
tools, financial products, calculations, estimates, forecasts, comparison shopping products and services
are presented without warranty.