Most of us are pretty stressed by the need to give our savings a big boost as we approach retirement. Guess what? There is actually a relatively little known retirement savings strategy that can really help: Catch up contributions.
Catch up contributions are the IRS’s way of making it easier for savers age 50 and up to tuck away enough retirement savings.
You probably already know that there’s a limit to how much you’re allowed to save in tax-advantaged retirement account such as IRAs and 401(k)s. Well, once you reach age 50, you’re allowed to make additional “catch up” contributions over and above those annual contribution limits.
However, according to a Transamerica Center study, only 52% of workers know about catch up contributions.
Time to learn about this strategy and start applying it to your retirement planning:
2018 contribution limits for retirement savings accounts
The contribution limits and annual catch up contribution allowance vary depending on the type of retirement savings account you own. However, if you are 50 or over and have both an IRA and a 401k, you can save an additional $7,000 over the $24,000 you can already save with tax advantages — totaling $31,000.
For 2018, the catch up contribution limits are as follows:
Catch Up 401(k) Contributions: The 401(k) plan annual contribution limit is $18,500 — an additional $500 over 2017 — while the catch up contribution is $6,000. This means that if you are 50 or over 50, you can contribute a total of $24,500 per year into your 401(k).
Catch Up IRA Contributions: The IRA annual contribution limit is $5,500 and the catch up IRA contribution is $1,000, allowing workers age 50 and over to contribute a total of $6,500 per year.
Note that the contribution limits for traditional IRAs and Roth IRAs overlap. In other words, if you are 50 or older you can contribute a total of $6,500 per year split however you want between traditional and Roth IRAs (assuming that you meet the income limits for contributing to a Roth account).
However, the limits between 401(k)s and IRAs do not overlap, so you can max out your contributions for both types of accounts in the same year.