In order to retire comfortably, you have to be cleverer than ever in taking advantage of all the retirement savings options available to you. With so many potential obstacles to making ends meet during your golden years, the more you can save over the course of your career, the easier it'll be to live the life you want after you've stopped working.
Millions of people use IRAs to help them set money aside for retirement. These tax-favored vehicles give savers a chance to get valuable tax benefits on their savings, and they come with a provision that many people don't even know about. Almost 1.5 million taxpayers took advantage of this special IRA opportunity, and if you qualify, you could join their ranks -- and put yourself in an even better position to have the retirement of your dreams.
Using IRAs to catch up on your retirement goals
One of the most difficult aspects of saving for retirement is figuring out when you can comfortably begin to start setting money aside. The earlier you start investing, the more time your money will have to grow, and the power of compounding makes an early start extremely valuable. For instance, if you start saving at age 25, your money will grow to more than double what it would if you start saving the same amount at age 35.
Yet most people have a lot of financial challenges in starting to invest for retirement early in their careers. Many young adults have massive student loan debt to pay off before they can even think about beginning to invest. Competing priorities, like buying a home and starting a family, often lead to the decision to delay retirement savings. As a result, it's not uncommon for people to wait until well into middle age before seriously addressing the need to save for retirement.
It's with that fact in mind that lawmakers decided to include provisions in the rules governing IRAs to allow for what are known as catch-up contributions. Each year, you're entitled to contribute up to a certain maximum amount to an IRA. For 2019, that number is $6,000. However, if you're 50 years old or older, then you also become eligible to save an extra $1,000. This added amount is intended to help older workers catch up on their retirement savings goals -- which they might have neglected earlier in their careers.
A cadre of catcher-uppers
Not everyone takes advantage of the ability to make those catch-up contributions, but many do. Almost 1.35 million Americans took advantage of the catch-up provisions to contribute the full extra $1,000 in the most recent year for which the IRS has made data available. Another 50,000 made catch-up contributions of more than $500 but less than $1,000, while 87,000 made at least some catch-up contribution of up to $500. That adds up to more than 1.48 million taxpayers, and together, the amount of their catch-up contributions totaled almost $1.43 billion.
Moreover, it's never too late to start catching up. Contributions among those 50 and older were fairly evenly split across age groups, with the number of taxpayers rising in the 55-59 cohort and keeping stable in the 60-64 cohort. Contributor counts declined back to 50-54 levels between ages 65 and 70 1/2. Contributions to traditional IRAs is currently prohibited for those older than 70 1/2 --although Roth contributions are still allowed at any age, as long as you have earned income.
Even if you're not yet old enough to qualify to make catch-up contributions, it's still a smart idea to start saving for retirement as soon as you can. The earlier you begin, the easier it'll be. But don't stress if you've waited too long: Catch-up contributions have made a big difference in helping nearly 1.5 million people boost their retirement savings -- and you could be one of them.