Planning in Your 50s: Catch-Up Contributions - Adviser Investments

Planning in Your 50s: Catch-Up Contributions

April 1, 2021

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 accounts (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 IRA 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.

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