You probably know that the best way to save for retirement is to get started as early as possible to maximize the power of compounding. Unfortunately, we don't have the luxury of time travel. If you're in your 50s and find that your retirement savings are lacking, it doesn't necessarily spell doomsday for your retirement.
Many workers enter their peak earning years in their 40s and 50s. Once you're in your 50s, you can use the extra money you're earning to take advantage of catch-up contributions.
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What are catch-up contributions?
Catch-up contributions are extra contributions you can make to retirement accounts, like 401(k)s and individual retirement accounts (IRAs), once you reach age 50. If you contribute to a health savings account (HSA), catch-up contributions begin at age 55.
Essentially, catch-up contributions help you make up for lost time if you got a late start on investing. Or if you have a high income, catch-up contributions can help you lower your taxable income once you reach the age of eligibility by allowing you to put more money in a tax-deferred account.
In 2023, catch-up contributions allow you to contribute the following amounts beginning the year in which you turn 50:
- An extra $7,500 ($30,000 total) to a 401(k), 403(b), governmental 457(b), or SARSEP
- An extra $1,000 ($7,500 total) to a traditional or Roth IRA
- An extra $3,500 ($19,000 total) to a SIMPLE IRA or SIMPLE 401(k)
In addition, you can contribute an extra $1,000 ($4,850 total for self-only coverage or $8,750 for family coverage) to an HSA beginning the year in which you turn 55.
Note that if you're contributing to a workplace retirement account, you'll need to check with your plan administrator to confirm that catch-up contributions are allowed. But chances are you won't run into any problems. In 2022, Vanguard reported that 98% of its plans permitted them.
Should you make catch-up contributions?
Catch-up contributions are a great way to give your retirement accounts a boost if you can afford to make them -- but that's a pretty big "if." Kicking an extra $1,000 into your IRA may not be so difficult, but contributing an extra $7,500 to your 401(k) -- on top of the $22,500 you'd need to max out the base contribution -- isn't so easy for most people.
Generally, the best move is to build a six-month emergency fund, pay off high-interest debt first, and then contribute as much as you can to your retirement accounts. If you can easily afford to make catch-up contributions, by all means do so. But you wouldn't want to take money out of savings that you'd need for an emergency or delay paying off a credit card just so you can make catch-up contributions.
Financial planners recommend saving 15% to 20% annually each year for retirement. If you got a late start to retirement planning but now earn enough to make catch-up contributions, by all means take advantage. Otherwise, you might want to save as much as you can but aim to retire later and delay taking Social Security to make up for the savings shortfall.
