I want to talk about Catch Up Contributions for your IRA or 401k. To be clear, this time when I say “save more” I mean “save more for retirement,” rather than saving money on products or services. “Catch Up Contributions” are not just slang, they’re a government program that allows people 50 or older to contribute extra to their IRAs and 401Ks. Catch up contributions also apply to 403-Bs and 457-Bs, and the rules are similar for those, but since those are less common, I’m going to focus on IRAs and 401ks.
The great thing about saving for retirement in a regular IRA or 401k is that you squirrel the money away on a pre-tax basis, which means you don’t pay tax on it and you lower the amount of income you are taxed on for the year. You are eligible to make catchup contributions if you turn 50 before the end of the plan year, the fiscal year used by your IRA or 401k plan.
- For 2018, anybody is allowed to contribute $5,500 to an IRA. People age 50 and up can save an extra $1,000 in an IRA thanks to catchup contributions. Be sure to check special rules for different types of IRAs.
- The really juicy opportunity is in 401ks. The 401k contribution limit for 2018 is usually $18,500. But if you are age 50 or older, you can sock away an extra $6,000 for a total of $24,500 a year!
- For SIMPLE IRAs, the regular contribution limit is $12,500 in 2018 and people 50 and up can contribute an extra $3,000 for a total of $15,500.
If you manage to sock away the extra $6,000 in a 401k every year for 15 years and earn a 6% rate of return, you would have roughly $150,000 more when you retire than if you just put in the maximum younger people are allowed to contribute.
If you’re under 50, you may wonder how this strategy applies to you and why I’m covering it here. Well, Chances are, catch up contributions will still exist when you DO turn 50, so why not start saving up now so that you have extra money to stick in your IRA or 401k when you ARE 50?