The IRS does a good job of providing the country's elders with ways to save for retirement. Some of the most popular investment vehicles the IRS provides access to for the benefit of US taxpayers include 401(k) accounts and a variety of IRAs.
While both options provide a variety of benefits to the taxpayer, the primary benefit involves taxation. In some cases, taxpayers can make investment with pre-tax dollars, effectively deferring taxes until they take distributions. In other cases, taxpayers can make their contributions with after-tax dollars with no taxation on the earnings that originate from those investments.
For taxpayers 50 years and over, there's another benefit the IRS makes available. The IRS allows what they refer to as "catch-up" contributions. The following information will pertain to said contributions and how they are administered.
What are Catch-up Contributions
By the time a taxpayer reaches age 50, there's a little more urgency about putting aside money for retirement. If someone age 50 or older hasn't yet established any kind of retirement investment account, that urgency tends to increase 10-fold. Catch-up contributions allow the taxpayer to increase the amount of their annual contribution above and beyond the statutory limits of investment as set forth by the IRS.
If you qualify for catch-up contributions, you need to understand that the limits for said contributions will differ from one type of retirement investment account to the next. It's important that you recognize which type of retirement account you own and what the applicable investment limitations are on your account. This is important information you'll need to in order to keep yourself from violating any rules that might disqualify your account.
Types of Retirement Investment Account
While there are as many as a dozen different retirement saving options, the following information is going to focus on the most basic options and the applicable catch-up contribution limitations for 2019 as prescribed by the IRS. Remember, this provision is only available to taxpayers who are 50 years of age or older. Note: You will qualify to begin making daily/weekly/monthly at any time during the year you turn 50 years old.
IRAs (Traditional, Roth, SEP, etc.) - The standard contribution limit for 2019 is $6,000. The catch-up contribution limit is set at $1,000.
401(k) and Other Workplace Retirement Plans (401(k)s, 403(b)s, most 457s and the government’s Thrift Savings Plan (TSP)) - The standard contribution limit for 2019 is set at $19,000. The catch-up contribution limit is set at $6,000. That's whopping $25,000 you can contribute to your account in 2019.
SIMPLE 401(k) - The standard contribution limit for 2019 is $13,000. The catch-up contribution limit is set at $3,000.
Why You Should Take Advantage of Catch-up Contributions
While it may be clear you'll derive financial benefits from taking advantage of catch-up contribution provisions, there's no harm in utilizing all possible options. Remember, you are moving towards retirement. The first benefit you'll get is the opportunity to put more money away over time.
If you have more money in your retirement investment account, you will earn more every year. If you put the allowable $6,000 into your IRA account with a 10% annualized return in 2019, your account value at the end of the year would be approximately $6,600. If your investment basis included another $1,000 for a total of $7,000 at 10%, your account value at the end of the year would be approximately $7,700. You earned an additional $100 on the extra contribution.
If your retirement account is employer-sponsored with a matching feature, your employer will also be matching the catch-up contribution. That's more money in your account for your retirement.
To initiate your catch-up contribution provision, all you need to do is contact your plan administrator or go into your online account and formally make your election. Then you are ready to go.
If you are serious about setting aside as much money as possible for retirement, it would be wise to take advantage of any provisions that will work in your favor. It would be fair to say that any reluctance to do this could be considered a lost opportunity.