Saving for retirement is something that many individuals start doing later in life than they should. It’s not hard to see why.
Throughout our twenties, many of us work to pay off our student loans and build our savings for a down payment on a house. We’re in our thirties and trying to pay off our mortgage while paying for childcare. Also, now that we’re in our forties, we have to save up for our children’s college educations so that they won’t have to suffer the same financial plight as we did.
This makes it simple to imagine someone getting to their 50s without nearly enough money saved for retirement. Thank goodness the Internal Revenue Service allows catch-up contributions for those saving later in life.
When you reach age 50, you can contribute an additional $1,000 to your IRA, above and above the limit for younger savers. In 2023, for instance, a person under 50 can contribute a maximum of $6,500 to an IRA. The maximum annual contribution is $7,500; however, those 50 and up are eligible for a $1,000 catch-up opportunity.
Yet, IRA catch-ups have stayed the same for a very long time. Indeed, they need help to get past the $1,000 barrier.
Yet, that is shifting due to new regulations. And it should encourage more people to save for retirement if they aren’t already doing so.
Inflation indexing is coming to IRA catch-up contributions.
The annual maximum contribution to a traditional IRA is increased by the amount of inflation each year. But, the $1,000 make-up has produced unexpected results.
The IRA catch-up has remained at $1,000 for many years because, unlike the primary amount ($6,500 this year), it has not been related to inflation.
In contrast, the SECURE 2.0 Act mandates that inflation adjustments be made to the base contribution and the IRA catch-up contribution beginning in 2024. As a result, retirees and others in their latter years should eventually have the opportunity to increase their savings.
To whom do catch-up payments apply?
The original intent of catch-up contributions may have been to allow employees who had fallen behind in their retirement savings to catch up. To be clear, you can take advantage of IRA catch-up contributions even if you still need to save as much as possible.
When you reach age 50, you can contribute an additional $1,000 to your IRA annually (or more if you factor in inflation). It makes no difference whether your savings balance at that time is $12,000. When you turn 50, you can make a more considerable annual contribution.
You should capitalize on the catch-up provision if you have fallen behind in IRA contributions. In the case of a typical IRA, not only will it help you finish your working life with more money for your retirement years, but it may also continuously access more of your earnings from taxation. And that’s an advantage you shouldn’t ignore.