age 50 or older?

BE SURE TO CAPITALIZE ON RETIREMENT CATCH-UP CONTRIBUTIONS

December 8, 2023

If you’ve surpassed 50 years of age, you qualify for an AARP membership and the associated discounts for:

While all those potential discounts are great, perhaps the biggest benefit of turning 50 is that you are (most likely) entering your highest-earning years. When you put all that together, the decade of your 50s should provide you with the most discretionary income of your lifetime. On the other hand, your 50s may also be the most expensive decade of your life. You may have children heading off to college, you might want to take those last family vacations before the kids head out on their own, and that vacation home you've been dreaming about may, finally, seem in reach.

Before you start planning extra expenditures, keep in mind that, once you’ve reached age 50, you are eligible to start making catch-up contributions to your retirement savings accounts. That’s not to suggest you forego those extras you've worked hard to enjoy—simply that you may want to bump up your retirement savings first, and then budget for the family vacations and other discretionary expenses.

Read on for specifics related to popular retirement savings plans. 

401(k), 403(b), or 457(b) Plans

These are all employer-sponsored plans—whether your employer is a for-profit company (401(k)), a nonprofit organization (403(b)), or a government entity (457(b))—that allow you to contribute a percent of your income up to a limit. You receive a tax deduction for the amount you contribute to the plan each year, and the funds in the plan grow tax deferred. This means that you won’t owe taxes on the growth each year, but when you take money out of the plan, those distributions will be taxed as ordinary income. Your employer can also contribute to the plan on your behalf. Additionally, some employer plans offer Roth contribution options. Roth contributions are made with after-tax money, and then grow tax-free. As long as certain requirements are met, distributions from the Roth plan will also be tax-free in retirement.

In 2024, you can contribute up to $23,000 to these plans, whether traditional, Roth, or a combination of the two. Those age 50 or over can contribute an additional $7,500. If you took advantage of this extra savings for 15 years (to age 65) and the funds earned 5% annually, you would have, approximately, an extra $169,931 of retirement savings.

SIMPLE IRA/401(k) Plans

A Savings Incentive Match Plan for Employees, commonly known as SIMPLE IRAs or SIMPLE 401(k)s, are retirement savings plans offered by employers with 100 employees or fewer. They work the same way as normal 401(k) plans except they are easier to administer and there are employer contribution requirements.

In 2024, you can contribute up to $16,000 to your employer-sponsored SIMPLE plan. Those age 50 or over can contribute an additional $3,500. If you took advantage of this extra savings for 15 years (to age 65) and the funds earned 5% annually, you would have, approximately, an extra $79,301 of retirement savings. If you are covered by a SIMPLE IRA, it is important to confirm that your plan allows for catch-up contribution as this is not a requirement.

Traditional IRA and Roth IRA Plans

In a traditional IRA, you may receive a tax deduction for the contributions you make, and those contributions would grow tax deferred. Again, this means that you wouldn’t owe taxes on the growth each year, but when you take the money out, those distributions would be taxed as ordinary income.

• If your tax status is Married Filing Jointly and you are covered by a qualified retirement plan at work, your ability to fully deduct your traditional IRA contribution begins to phase out when your modified adjusted gross income (MAGI) reaches $123,000. Once your MAGI is $143,000 or higher, you are no longer able to deduct this contribution. These income limits are $77,000 and $87,000, respectively, for Single taxpayers.
• If your tax status is Married Filing Jointly and your spouse is covered by a qualified retirement plan at work, your ability to fully deduct your traditional IRA contribution begins to phase out when your MAGI reaches $230,000. Once your MAGI is $240,000 or higher, you are no longer able to deduct this contribution. If your income exceeds the limits above, you can still make an after-tax contribution to your traditional IRA. If neither you nor your spouse (if applicable) are covered by a qualified retirement plan at work, then there is no income limitation on deducting your traditional IRA contributions.

Similar to a Roth 401(k), a Roth IRA allows you to save money you have already paid tax on. Contributions to Roth IRAs grow tax-free, and you can take the money out to supplement your retirement income, tax-free. Your ability to contribute to a Roth IRA is based solely on MAGI limits and is not affected by coverage under a qualified retirement plan.

• If your tax status is Married Filing Jointly, your ability to make the full allowable Roth IRA contribution begins to phase out when your MAGI reaches $230,000. Once your MAGI is $240,000 or higher, you are generally no longer able to make Roth IRA contributions. These income limits are $146,000 and $161,000, respectively, for Single taxpayers. (NOTE: Income you may have received from a Roth conversion is not included in your MAGI.)
• If your income exceeds the limits, you may be able to make a Backdoor Roth contribution. The process involves making an after-tax contribution to your traditional IRA and then converting it to a Roth IRA. It must be done correctly to make it work, so don't try this alone. Consult with your advisor to ensure you are following the rules.

In 2024, you can contribute up to $7,000 into a traditional IRA, Roth IRA, or a combination of the two. Starting at age 50, you can make an additional catch-up contribution of $1,000.

SEP Plans

Simplified Employee Pension (SEP) plans allow for employer contributions only. The employer can contribute up to the lesser of 25% of the employee's compensation or $69,000. There are no catch-up provisions for SEP Plans.

Keep in mind that all the plans listed above are intended for retirement savings. As such, the government imposes a 10% early withdrawal penalty for money taken out before age 59.5. There are some exemptions from this early withdrawal penalty so talk to your advisor before you make a withdrawal from any tax-advantaged retirement plan prior to age 59.5.

It's not possible to completely avoid paying taxes with any of these plans. If you received a tax deduction on contributions you made (i.e., your contributions were tax deferred), the plan has a provision that requires you take a required minimum distribution (RMD) starting at age 73. You will have to pay tax on these distributions as ordinary income; however, if you don't need the money, you can move the after-tax balance to a regular, taxable account and let it continue to grow. Because any contributions to Roth 401(k)s and Roth IRAs have already been taxed, those plans are not subject to RMDs.

You may or may not view your 50th birthday as a positive milestone. However, the ability to increase your tax-advantaged retirement savings can make your 65th birthday much more enjoyable.

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