Saving enough money for a comfortable retirement is probably one of your primary financial goals. With so many other demands on your money, it's easy to get off track. If you are 50 or older and want to make up for lost time, the tax law allows you to catch up on your savings by contributing extra amounts to an employer-sponsored retirement savings plan and/or an individual retirement account (IRA).
401(k) plans and their cousins — 403(b) tax-sheltered annuities, salary reduction SEPs, 457 governmental plans and SIMPLEs — allow participating employees to defer a portion of their pay to the plan on a pretax basis. You aren’t taxed on your plan contributions — or on any earnings your contributions generate — until you receive distributions from the plan.
The tax law limits this benefit by capping the annual amount of salary that can be deferred. As of 2020, the dollar limit is $19,500 ($13,500 for a SIMPLE IRA). But, if your plan allows it, you can contribute even more once you reach age 50. The maximum catch-up contribution for 2020 is $6,500 ($3,000 for a SIMPLE IRA).
A similar opportunity exists with IRAs. Eligible individuals who are at least 50 can contribute up to $7,000 of compensation for 2020 — $1,000 more than the $6,000 contribution limit that generally applies. There is no rule against contributing to an employer’s plan and an IRA — you can do both. Depending on your income, contributions to a traditional IRA may or may not be tax deductible when you or your spouse participate in an employer’s plan.
The annual limits on contributions will increase in the future. Regardless of your age, maximizing your contributions to retirement savings plans and IRAs may be a tax-smart way to prepare for the future. Your situation might differ, however, so be sure to consult a professional before acting.
Article is adapted from content provided by DST.
