Get your retirement savings back on track with catch-up contributions

Jared Funk, Vice President
June 28th, 2018 | 1:57 PM

How far are you from your ideal retirement age? 20 years?10? Perhaps only five? However close you are, you should be regularly reviewing your retirement savings account balances to confirm that you’re on track to meet your goals.

Unfortunately, only 18% of Americans are “very confident” that they’ll in fact have what they need to enjoy retirement, according to the Employee Benefit Research Institute. On the flip-side, one-third of Americans aren’t confident they’ll have enough. If you’re in this latter group, making “catch-up” contributions can help your situation. Here’s what they are and how you can make the most of them.

ABOVE AND BEYOND

Catch-up contributions are additional amounts beyond the regular annual limits that workers can contribute to certain tax-advantaged retirement accounts, such as 401(k) plans and IRAs. The higher limits are designed to help people who haven’t saved enough to meet their goals — and are closer to retirement age. So only those 50 and older are eligible to make catch-up contributions.

Say that you’ve contributed the standard 2018 limit of $18,500 to your 401(k) account. If you’re 50 or older, you can put aside an extra $6,000, for a total of $24,500. If your employer offers a Savings Incentive Match Plan for Employees (SIMPLE) instead, the
regular contribution maxes out at $12,500 in 2018. But if you’re 50 or older, you’re allowed to contribute an additional $3,000 — or $15,500 in total this year.

Be sure to check with your employer before making catch-up contributions. Although most 401(k) plans and SIMPLEs offer catch-up contributions, not all do.

IRA RULES

Another way to save more after age 50 is through a traditional IRA or a Roth IRA. With either plan, those 50 or older generally can contribute another $1,000 above the $5,500 limit for 2018. However, the ability to contribute to a Roth IRA is phased out based on income, and this option may not be available to higher-income individuals.

The benefits of making catch-up contributions differ depending on which account you’re considering. With a traditional IRA, contributions may be tax deductible, providing you with immediate tax savings. (The deductibility phases out at higher income levels if you or your spouse is covered by an employer retirement plan.)

Roth contributions are made with after-tax dollars, but qualified withdrawals are tax-free. By contributing to a Roth IRA and taking the tax hit up front, you won’t lose any of the income to taxes at withdrawal, provided you take them when you’re at least 59½ and have held the account at least five years. Another option if you’d like to enjoy tax-free withdrawals is to convert some or all of your traditional IRA to a Roth IRA — although you’ll also take an up-front tax hit.

SOLO OPTIONS

If you’re self-employed, retirement plans such as an individual 401(k) — or solo 401(k)s — also allow catch-up contributions. A solo 401(k) is a plan for those with no other employees. To catch up, you can add $6,000 to the regular yearly limit of $18,500 in 2018. But that’s just the employee salary deferral portion of the contribution.

You can also make an “employer” contribution. The total combined employee-employer contribution is limited to 25% of compensation, up to $55,000, plus the $6,000 catch-up contribution, for a total of $61,000 in 2018.

UNDERSTAND THE IMPACT

On first glance, catch-up contributions may seem like too little, too late. But don’t  underestimate the impact these additional savings dollars can have when compounded over time — even if you have only 10 years to invest before you retire. To help ensure catch-up contributions are enough to enable you to reach your retirement goals, talk to your Lenox Advisor. He or she can assess your savings needs based on your income, your retirement plans, when you hope to leave work and other financial goals.

To learn more or speak directly with a Lenox Advisor, click here to contact us.

CRN202004-229621