One powerful tool at your disposal worth considering if you’re going to be at least 50 before the end of the year, is the ability to make “catch-up” contributions to your retirement accounts. In this post, we'll delve into catch-up contributions, their significance, and highlight how you may take advantage of this provision.
Understanding Catch-Up Contributions
“Catch-up” contributions are a provision that allow individuals aged 50 and older to contribute more money to their retirement plan than they would otherwise be eligible for. This provision recognizes that many individuals nearing retirement may not have saved as much as they would have liked and provides them with an opportunity to accelerate their savings in the years leading up to retirement.
The catch-up contribution option is available for both employer-sponsored retirement plans (such as 401(k)s), TSPs, and Individual Retirement Accounts (IRAs)), making it an attractive option for those looking to bolster their retirement nest egg.
Benefits of Catch-Up Contributions
- Boost Your Retirement Savings: The primary advantage of catch-up contributions is quite straightforward – they allow you to contribute more money to your retirement accounts. Over time, these additional contributions can lead to substantial growth, especially when compounded by investment returns.
- Bridge the Gap: Catch-up contributions can be particularly useful if you've had periods of lower savings earlier in your career. They provide an opportunity to "catch up" on the savings you might have missed, bridging the gap between your current savings and your retirement goals.
Catch-up contributions are a valuable tool for individuals looking to secure their retirement. As we approach 2024, take advantage of these provisions to bolster your retirement savings. Remember to stay informed about contribution limits and consider seeking professional advice to ensure your financial strategy is aligned with your goals. Your future self will thank you for the steps you take today to ensure a comfortable retirement.
- 2025: A passage in the “SECURE Act 2.0”, passed in 2022, required that catch-up contributions for individuals making at least $145,000 be made into Roth (post-tax) accounts. In August 2023, partially in response to backlash from employers and retirement plan administrators, the IRS clarified that it would issue a two-year “transition period” for this ruling to take effect. That is, through 2025, you may still be able to make catch-up contributions on a pre-tax basis. This could allow for tax planning and strategizing for those higher-income earners before the provision fully transitions. It’s worth pointing out that, should Congress take no action, also set to sunset after 2025 are the provisions created by the Tax Cuts and Jobs Act – tax rates and estate and gift tax exemption amounts for starters, both of which will revert to their pre-2016 rates. Suffice to say, if you’re a high-earner and have any questions, give us a call at 206-973-4488.
- IRA Catch-Ups: Much as individuals have until the tax filing deadline of the following year to make IRA contributions for the prior year, so too do individuals have until the tax filing deadline of the following year to make any eligible catch-up contributions for the prior year. For example: if you turned 50 in 2023, you have until April 15, 2024 to make eligible catch-up contributions. (Filing an extension does not allow you to extend your IRA contribution deadline.)
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.