Use Catch-Up Contributions to Fill Out Your Retirement

Using a catch-up contribution with your retirement plan could potentially be very beneficial if you qualify. Many people get a late start on saving for retirement and the catch-up contribution is designed to help those people. Here are the basics of catch-up contributions and how you can use them to fill out your retirement savings.

Catch-Up Contributions

The catch-up contribution is a provision that was enacted by the federal government to allow individuals to contribute more money to a retirement plan. Not everyone is eligible to utilize a catch-up contribution. In order to start making these contributions, you have to be over the age of 50. All of the major retirement plan options have some type of a provision for catch-up contributions that could benefit you.

401k

One of the most common types of retirement plans that is used is the 401k. This type of retirement plan is offered through employers and allows individuals to make contributions. Currently, you can put away up to $16,500 per year into your retirement plan. With the catch-up contribution, you will be able to put away even more than this. According to current rules, you can contribute as much as $22,000 once you are over the age of 50. If you plan on doing this every year until you reach retirement age, this will amount to an extra $55,000 that you can invest in the markets. If your income has increased to a point where you can max out your contribution, this will really provide you with a great opportunity to put away extra money for your retirement.

IRA

The individual retirement account or IRA is another popular alternative for retirement savings. This type of account allows you to contribute up to $5000 of pre-tax money every year. If you are over the age of 50, you can bump up your annual contribution to $6000 per year. This is not nearly as big of an increase as is allowed with the 401k, but it does help a little. The annual contribution limits are exactly the same for the Roth IRA as well.

Importance of Catch-Up Contributions

If you got a late start on your retirement planning, this type of contribution could be essential to your success. If you want to live a comfortable life upon reaching retirement, this might be necessary in order to do so. By increasing the amount of money that you can invest, you will also increase the potential returns that you can gain in the financial markets. The money that is invested in your account is allowed to grow tax-free. This means that in only 10 years of catch-up contributions, you can make a big difference in the amount of money that you have available when you retire.

Tax Savings

In addition to increasing the amount of money that you have for retirement, this can be used as a tax savings strategy as well. The more money that you contribute to your retirement plan, the more money you will be able to deduct from your taxable income on the year. 

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