If you’re turning 50 this year, you might be asking yourself, “Are there any benefits of hitting this milestone other than being able to join AARP?”
Well, if you’re making the maximum annual contribution to your retirement accounts but you’re still worried that you’re not building your nest-egg fast enough, the answer is “Yes!”
That’s because once you hit the big “Five Oh” you can take advantage of so-called “catch-up contributions,” which right now let you put away as much as $7,500 more into your retirement accounts every year. And this amount is likely to go up.
Catch-up benefits for IRA contributors
You don’t have to have a retirement plan at work to take advantage of these catch-up benefits. If you’re eligible to contribute to a Traditional or Roth IRA, you can invest an additional $1,000 over the standard $6,000 yearly maximum contribution, for a total of $7,000.
Even bigger benefits for retirement plan participants
If you’re under 50, your own annual contributions to most company retirement plans max out at $19,500 a year. But once you turn 50, you can make additional annual catch-up contributions of up to $6,500 to your company’s 401(k) or 403(b) plan (for a total of $26,000) or up to $3,000 more to your firm’s SIMPLE IRA (for a total of $22,500). (Note that not all plans allow for catch-up contributions, although most do.)
Another benefit: Making catch-up contributions on a pre-tax basis may help you lower your annual tax bill.
Another potential benefit: If your company makes matching or other contributions to your account, the total combined amount that you and your employer can contribute can be as high as $57,000 in 2020.
Combine them for maximum savings
If you participate in a retirement plan and have an IRA, the news is even better. You can take advantage of catch-up contributions in both accounts, allowing you to contribute a combined catch-up amount of as much as $7,500 more than those "unfortunate" people who haven't turned 50 yet.
Expect an increase
Inflation can gradually erode the value of your money. That’s why, under normal circumstances, the IRS announces annual cost-of-living adjustments that raise contribution limits, so you can save even more.
Think about it. If you turn 50 this year, plan to retire at 70 and are able to maximize your annual contributions to both your retirement plan and IRA accounts over the next 20 years, you could potentially put away as much as $660,000 toward your retirement even if the IRS never raises contribution limits again. That’s a possibility worth celebrating.
This article was authored by Dan Flanagan, a financial advisor and Partner located at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 508.598.1082 or [email protected]
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