Funnel more into your 401k and IRA with catch-ups
If you’re hitting the big 5-0 this year, or have already passed it, congrats---you’re entitled to extra tax breaks when saving for retirement. These are called “catch-up” contributions, and you can start making them now, even if your 50th birthday isn’t until Dec. 31.
For 2017, an employee can put up to $18,000 a year pre-tax into a 401k. But the catch-up provision allows older workers to stash another $6,000 away before taxes. So, that’s $24,000 you can shield from income taxes. The same catch-up allowances apply to 403(b) accounts for employees of non-profits, 457 plans for government workers and solo 401(k)s for the self-employed.
Anyone turning 50 with the cash flow to make catch-up contributions should, but catch-ups are really important if you’re getting a late start on retirement planning. A couple in their mid-50s who run a $500,000 online toy business came to Cranbury, N.J.-based enrolled agent Leonard Steinberg for help with bookkeeping, and after discovering they had no retirement plan, he told them about how they could catch up. “All of a sudden their eyes widened,” he says. They opened a self-employed 401(k) (also known as an individual or solo 401(k), available for a business owner plus one) and stuffed in employee and employer contributions. For 2017, an individual aged 50-plus can stuff up to $54,000, including $6,000 in catch-up contributions, into one of these accounts.
What if your workplace plan offers a Roth option? That’s where your contributions aren’t tax deductible but all your withdrawals in retirement are tax free. You can funnel some or all of your $6,000 catch-up into the Roth, instead, if you chose.
Catch-ups are also available to those who contribute to a Roth IRA or a traditional IRA. If you’ll be 50 or older by the end of the year, you can put $6,500 into one of these accounts for 2017. That’s $1,000 more than the limit for younger folks. (In all cases, other eligibility rules still apply.)
Note: the contribution limits are maximums. You can put in the max one year, and less another year. “You try to do as much as you can based on cash flow,” Steinberg says. A client who owns a pizza place could swing the $6,500 contributions to a Roth IRA in most years.
Half of traditional IRA investors aged 50 to 69 made the full age-allowed contribution of $6,500 in 2015, and 45% of Roth IRA investors aged 50 and older did so, according to the Investment Company Institute. (With a Roth IRA, you can contribute past age 70.)
Vanguard found that overall 12% of employees offered catch-ups in workplace plans took advantage of them in 2016: 6% of employees earning $75,000 to $100,000 made catch-ups, compared to four in 10 employees (39%) with incomes of more than $100,000.
Watch out for different catch-up rules for different types of retirement accounts. The SIMPLE IRA catch-up limit is $3,000. There are no catch-ups for SEP-IRAs. Using a Health Savings Account to build up savings for health care expenses in retirement? You can make $1,000 a year extra in pre-tax catch-up contributions to HSAs, but you’re not eligible to make those until you’re 55.
For current IRS contribution limits, please visit our website voyadelivers.com/irslimits.