Turning 50 is momentous for so many reasons—including the extra boost you can provide to your retirement savings. We touched on this in Part One of our three-part series on financial planning in your 50s (and here’s Part Two on streamlining), but we think catch-up contributions are worthy of a little extra attention.
The Internal Revenue Service (IRS) allows investors to contribute to tax-advantaged retirement accounts up to a specified limit per calendar year. In 2021, that limit is $6,000 to individual retirement accountsA type of account in which funds can be saved and invested without being subject to tax until the account holder reaches retirement age. (IRAs) and $19,500 to 401(k)s and other workplace retirement plans like 403(b)s and Thrift Savings Plans. At Adviser Investments, we encourage all clients to make consistent contributions to these accounts every year.
But the truth is, many people don’t even come close to maxing out their retirement account contributions—especially in their younger years. And that can leave them lagging where they need to be as retirement approaches. That’s why the big 5-0 is such an important milestone: It’s when the IRS lets you start playing catch-up.
For most people, the 50s represent peak earning years. Making catch-up contributions to your retirement accounts can help you compensate for any deficit in your savings while still giving your investments a decade-plus to compound.
If you have the cash flow to max out your retirement accounts in your 50s and also make catch-up contributions on top of that, we highly recommend it. In 2021, the IRS allows anyone over 50 to contribute an additional $1,000 to an IRAA type of account in which funds can be saved and invested without being subject to tax until the account holder reaches retirement age. and an additional $6,500 to workplace retirement plans.
What if you are already maxing out your 401(k) and IRA limits each year? Should you go beyond that? The answer depends on your individual situation. One rule of thumb is to aim to put 10%–15% of your salary toward retirement at this stage in your life.
Higher earners should note that phaseout and upper income limits may make you ineligible to take full advantage of a traditional IRA’s tax deduction or to contribute to a Roth IRA—but those limits do not prevent you from earmarking other taxable investments for your retirement.
We list those limits for tax-year 2021 on page 2 of our Key Financial & Tax Planning desk reference piece. And remember, the IRS has extended the deadline to make 2020 contributions for retirement accounts to May 17 this year, giving you even more time to catch up.
That said, don’t be overly concerned about hitting an arbitrary threshold. We advise our clients to save as much as they are reasonably able.
If you have questions about how much you should be contributing to your retirement accounts and whether you are on track for retirement, please contact your wealth management team. We’re happy to help.
This material is distributed for informational purposes only. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.
Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.
Past performance is not an indication of future returns. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. Always consult a licensed attorney, tax professional or licensed insurance professional regarding your specific legal or tax situation, or insurance needs.
Companies mentioned in this article are not necessarily held in client portfolios and our references to them should not be viewed as a recommendation to buy, sell or hold any of them.
© 2021 Adviser Investments, LLC. All Rights Reserved.