Catch-up contributions: How to boost your retirement planning

Retirement planning is one of the most important parts of your long-term financial security. Even though this is well-known, it’s also true that life’s everyday demands— never mind the random events that may cause sudden changes or turmoil— can make consistent saving difficult. Juggling career changes, family responsibilities, homeownership, and daily expenses can strain our resources and time. Because of this, there's a valuable tool available for those aged 50 and above to bolster their retirement savings—catch-up contributions. This article delves into what you need to know about catch-up contributions and guides you on how and when to employ them, so you can feel even more confident along your path towards a more assured future.

What are catch-up contributions and who is eligible?

Catch-up contributions are additional contributions allowed beyond standard limits set by retirement account regulations. Their primary purpose is to enable individuals aged 50 and above to bolster their retirement savings, acknowledging that they may have fewer years left in the workforce to save compared to their younger counterparts.

To qualify for catch-up contributions, individuals must be at least 50 years old by the end of the calendar year. This criterion applies to various retirement accounts, including 401(k), 403(b), 457(b), and simple IRA. These accounts allow different amounts of catch-up contributions:

• 401(k) and 403(b) allow a maximum $23,000 annual contribution; catch-up contributions up to $7,500 are allowed once you turn 50.
• IRAs allow a maximum regular contribution of $7,000 with catch-up contributions of $1,000 allowed for those aged 50 and up.

Notably, some accounts, like Roth IRAs, do not permit catch-up contributions, emphasizing the need for careful account selection based on current circumstances and personal financial goals. In addition, in 2022 Congress passed the Secure 2.0 Act which modified how higher-income households are able to use catch-up contributions. If you fall into this category you’ll want to enlist the guidance of an experienced financial professional to walk you through the details.

Importance of catch-up contributions for retirement planning

Catch-up contributions are an important tool to help working people achieve retirement security, even if the path to saving hasn’t been straightforward. Benefits include:

• Addressing gaps in retirement savings: Catch-up contributions can help bridge financial gaps caused by factors like gender-related income disparities or employment interruptions, helping workers make up for lost savings time and opportunities.
• Compound interest: Increased contributions, even those made at a later point in time, still benefit from the power of compound interest, which increases the growth potential of retirement funds each year.
• Impact on retirement readiness: Using catch-up contributions can improve your feeling of retirement readiness, ensuring you to take charge of your retirement timeline and enjoy a more secure and comfortable financial future.

Strategies for using catch-up contributions for retirement planning

If you are thinking about using catch-up contributions to enhance your retirement savings, it’s a good idea to consult with a financial professional to make sure you understand tax ramifications and other strategic decisions you may want to consider. Some fundamental considerations include:

• Budgeting: To use catch-up contributions effectively, make sure you have an up-to-date and comprehensive budget outlining current needs as well as future goals and possibilities. With an understanding of all your expenses and income streams you may find you are able to allocate additional funds towards retirement savings.
• Maximize contributions alongside regular savings: Consider dividing additional funds between catch-up contributions and a high-yield savings or your emergency savings fund so that you can continue building your financial stability now and for the future. 
• Adjusting investment strategies: Additional contributions might prompt a reassessment of investment strategies. A financial professional can help you considering factors like risk tolerance and diversification to accommodate increased contributions and manage tax considerations effectively.

Benefits and limitations

Catch-up contributions offer the advantage of accelerated savings, enabling individuals to build a more substantial retirement nest egg within a shorter timeframe. Often, on approaching retirement age, people realize they have to reduce their retirement budget based on the amount they have saved. Others may postpone retirement to continue working longer to accrue more savings. Catch-up contributions provide an alternative to these options, but they are not without limitations. 

While there are possible favorable tax benefits for those using catch-up contributions— annual taxable income is lowered when contributions are made to retirement savings accounts— distributions and how they are taxed may be impacted when you do retire. 

Tailoring catch-up contribution strategies to different life stages is essential. Early planning allows for more gradual increases, while those nearing retirement may opt for more aggressive catch-up contributions.

If you’re getting closer to your target retirement age, it’s a good idea to take time to assess your savings goals and retirement timeline to determine the most effective way to leverage catch-up contributions through your remaining working years. Always consult with a financial professional to make sure your strategies are best aligned with your current situation and future goals.

Conclusion

Catch-up contributions are an important tool for anyone who wants an additional boost to their retirement savings. They help address savings gaps, harness compound interest, and enhance retirement readiness.

Reach out today to meet with a financial professional who can help you make informed decisions and take proactive steps toward the comfortable retirement you envision. 

This informational and educational article does not offer or constitute and should not be relied upon as tax or financial advice. Your unique needs, goals and circumstances require the individualized attention of your own tax professionals. Equitable Advisors, LLC and its associates and affiliates do not provide tax or legal advice or services.

Equitable is the brand name of the retirement and protection subsidiaries of Equitable Holdings, Inc., including Equitable Financial Life Insurance Company (NY, NY), Equitable Financial Life Insurance Company of America, an AZ stock company with an administrative office in Charlotte, NC, and Equitable Distributors, LLC. Equitable Advisors is the brand name of Equitable Advisors, LLC (member FINRA, SIPC) (Equitable Financial Advisors in MI and TN).