You may have heard that the sooner you get started with retirement saving, the better. And it’s definitely true. Your investment dollars have far more compounding power if you start at 25 than 45.
While you might not have quite as much of a time advantage if you’re 50 or older, you do have one thing that younger investors don’t — the ability to save more in your retirement accounts. Virtually every type of tax-advantaged retirement account has a provision that allows older savers to set aside more money than the general investing population, and these are known as catch-up contributions. In a nutshell, catch-up contributions allow Americans to boost their savings in the years shortly before they reach retirement age.
With that in mind, here’s a quick rundown of the catch-up contribution rules for 2023 and what they could mean to your retirement.
Catch-up contribution rules by account type
IRA: For traditional and Roth IRAs, the 2023 contribution limit is $6,500, with an additional $1,000 catch-up contribution allowed for savers 50 and older.
401(k)/403(b)/457: The standard contribution limit for these account types is $22,500 in 2023 for elective deferrals, and individuals ages 50 or older can contribute an additional $7,500 for a total of up to $30,000.
SEP-IRA: Since all SEP-IRA contributions come from the employer, there is no such thing as catch-up contributions. However, the contribution limit for 2023 has risen to $66,000, or 25% of compensation, whichever is less.
SIMPLE IRA: The 2023 SIMPLE IRA contribution limit is $15,500 for employee contributions, with a $3,500 catch-up contribution allowed for participants over 50.
Catch-up contributions are about to get even better
The Secure 2.0 Act was recently signed into law, and among other changes to retirement savings, it is making some important changes to catch-up contributions. Here are the highlights:
- The $1,000 catch-up contribution for traditional and Roth IRAs will begin to adjust for inflation annually, starting in 2024.
- A special (greater) catch-up contribution limit is starting in 2025 for participants of employer-sponsored retirement plans, such as 401(k)s. Savers ages 60 to 63 years old get a catch-up contribution limit of $10,000, or 150% of the standard catch-up limit, whichever is greater.
- The SIMPLE IRA catch-up limit will increase by 10% in 2024 and account owners 60 to 63 years old will get a $5,000 catch-up limit, or 150% of the standard amount, whichever is greater.
How much of a difference can catch-up contributions make?
Let’s say that you have a Roth IRA and decide to take full advantage of the catch-up contributions from ages 50 to 65 by contributing an additional $1,000. Based on a 7% annualized rate of return, those extra contributions would produce about $28,000 in extra retirement savings added to your nest egg compared with what standard contributions would produce. This could have a significant impact on your financial security in retirement. 401(k) and other account holders with higher catch-up limits could see a much bigger difference.
The bottom line is that if you’re 50 years old or older, it can be a smart idea to take advantage of catch-up contributions. You will create additional financial security for your retirement and can get larger tax breaks in the meantime.
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