Retirement — and the funds that hopefully go with it — start to become a serious consideration for many as they get closer to age 65. Most financial experts will tell you that it's never too early to start thinking about and saving for your golden years, but obviously, life is not always ideal.
If you're still working and have found that your retirement accounts aren't quite where you want them to be, you may have the option to make catch-up contributions. These are extra funds you pay into retirement accounts — often pretax — to help bulk up your savings to cover plans you have later. That could include travel as an older adult, paying for your regular lifestyle after you retire from work or covering the costs of moving into an assisted living community such as Cambridge Court.
Find out more about catch-up contributions below.
Certain qualified retirement accounts let people contribute pretax dollars each year. That lets you save for retirement while reducing your current tax burden.
However, the IRS limits how much people can contribute pretax every year. You can't, for example, dump all your pay into a 401(k) as a way of avoiding paying any taxes this year.
The IRS publishes contribution limits for every tax year. Here are the standard contribution limits for the 2022 tax year:
People who are over the age of 50, however, may be able to exceed these limits with what are known as catch-up contributions. These are extra payments into accounts to help catch up on your retirement savings plans.
Note that your income and what types of retirement accounts you have can change your contribution limits, particularly with regard to IRAs. If you're using contributions as a way to manage your current tax burden, it's always a good idea to talk to a tax professional to ensure you're maximizing the benefit while avoiding overstepping limits.
Many people earn more per year as they go through their careers. The ability to set aside more for retirement when you're in your 50s and early 60s lets you take advantage of potentially higher earnings to increase retirement savings.
Depending on your income, you could use this as a way to keep yourself in a lower tax bracket and cut down on some of your immediate tax burden. By putting extra money into your retirement accounts in your early 50s, you also give that money more time to earn interest. That can cover the cost of the taxes you might need to pay later.
The following types of plans allow you to make at least some catch-up contributions each year:
If you're not sure you have a plan that would allow catch-up contributions, consider talking to a financial advisor or tax professional. They can also help you understand the potential pros and cons of catch-up payments at your current phase in life so you can make an educated decision about what to do.
How much you can contribute in catch-up funds each calendar year depends on the type of retirement plan you have, your income and a few other factors. Here's a quick look at the maximum allowed for various types of plans:
Note that there are requirements for eligibility to make catch-up payments. You must turn 50 or be 50 or older within the calendar year the payments are made. For 403(b) plans, you must have at least 15 years of eligible service.
Catch-up contributions are just one potential financial strategy for individuals getting closer to retirement. And while you're considering your own financials, you might want to think about investing in your grandchildren or others. Consider talking to a financial advisor or retirement planning expert to ensure you're doing everything you can to make the next chapter of your life as enjoyable and stable as possible.