If you are age 50 or older and are still working for someone else, you have a great opportunity to play catch-up. In 2020, the IRS allows you to put even more tax-advantaged money into your workplace 401(k) plan: $6,500 in catch-up contributions in addition to the $19,500 IRS annual contribution limit ($26,000 total). For IRAs it's the $6,000 annual contribution limit, plus a $1,000 catch-up contribution ($7,000 total).
This means you may be able to save up to a grand total of $33,000 in 2020 by taking advantage of catch-up contributions for your 401(k) and IRA. That amount can really add up. For example, if you are age 50 and if you save the maximum amount each year over 15 years, you could put away $292,500 in annual contributions and $97,500 in catch-up contributions for your 401(k)s, and $90,000 in annual contributions plus an extra $15,000 in annual catch-up contributions for your IRAs (based on today’s contribution limits) — and that's if you stop working at 65. If you are self-employed, you can save even more as the limit for the overall defined contribution plans are now $57,000 and makes your savings over 15 years even higher.
"The more money you put an away, the more choices you have in retirement," says Scott Alan Turner, a personal finance expert and host of the Financial Rock Star podcast. "That includes where you will live, how you will spend your time, and how much travel you can do."
Still not convinced it's worth putting aside the extra money each year? Matt Rutledge, research economist at the Center for Retirement Research, says it's a smart move for pretty much everyone who can afford it. "Granted, everyone's situation is different, and if you think you will have a tax rate in retirement that will be similar to your current tax rate, you may not think it's important, but it's really hard to beat deferring your taxes to a later date. Plus, anyone who will have a lower tax bracket in retirement can see big savings down the road."
Considering taking advantage of a catch-up contribution? Consult your financial professional to see how it may affect your financial retirement strategy along with your tax or legal advisor regarding your individual situation prior to making any decisions.
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The opinions expressed in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.