A majority of 401(k) plan participants say their 401(k) plan is their sole or largest source of retirement savings . But how can you be sure you’re making the most of your employer retirement plan? Let us Help!
If you’re 50 or older as of year-end, you’re eligible to make ‘catch-up’ contributions to certain tax-favored retirement accounts. Many people fail to capitalize on this opportunity and don’t realize the difference extra contributions can make in their retirement nest-egg.
If your employer’s retirement plan allows them, you can make extra contributions to your 401(k), 403(b), or 457 accounts beginning in the year you turn 50. Such contributions are subtracted from your taxable wages, so you effectively also get a federal income tax deduction. If you pay state income tax, you may also get a state tax deduction. Any tax savings can be used to help pay for your catch-up contribution or set aside in a taxable retirement savings account to further increase your savings.
Maximum catch-up contributions are considerably larger now than when they were introduced and offer an extra opportunity to save for retirement. At this time, catch-up contributions to 401(k), 403(b) and 457 plans are capped at $5,500. For traditional and Roth IRAs, they’re capped at $1,000. Going forward, catch-up contribution limits are indexed to inflation and will be adjusted in increments of $500 as needed.
If you contribute an extra $5,500 in the year you turn 50 and each year until age 65, you can accumulate quite a bit of extra money in your account. Look below to see how much additional money can be saved through catch-up contributions (before-tax numbers).*
You can also make extra catch-up contributions to your traditional or Roth IRA. Contributions to traditional IRAs are tax-deductible if your income isn’t too high. Contributions to Roth IRAs aren’t tax-deductible, but you can make tax-free withdrawals after age 59½ if you've had at least one Roth account open five years or more.
If you contribute an extra $1,000 in the year you turn 50 and each year until age 65, you can accumulate quite a bit of extra money in your IRA. Look below to see how much additional money can be saved through catch-up contributions (before-tax numbers for a traditional IRA and after-tax numbers for a Roth IRA).*
Remember, your contributions to a traditional IRA or workplace retirement account benefit from tax-deferred earnings. So, even if your income is too high to deduct your contribution or contribute to a Roth IRA, you can benefit from tax-deferred growth. IRA contributions—catch-up or not—for any year are due by April 15 of the following year.
*interest compounded one time annually; contributions at start of compounding period
1 According to Schwab Retirement Plan Services
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