There's a reason workers are often advised to try to max out their IRAs or 401(k)s: The more money you put into one of these accounts, the more retirement wealth you stand to grow. And because these accounts are tax advantaged, maxing out allows you to shield more income from the IRS.
Now, maxing out a retirement plan means something different depending on how old you are and the type of savings plan you have. This year, IRAs max out at $6,500 for workers under age 50. In 2024, that limit will rise to $7,000.
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Meanwhile, 401(k) plans currently max out at $22,500 for savers under 50. Net year, that limit goes up to $23,000.
Both IRAs and 401(k) plans allow savers aged 50 and over to make catch-up contributions. For IRAs, that catch-up contribution is $1,000, and for 401(k)s, it's $6,500. These catch-up amounts are staying the same for 2024.
So all told, right now, if you're 50 or older, maxing out an IRA means contributing $7,500 this year and $8,000 in 2024. For a 401(k), it means contributing $30,000 this year and $30,500 in 2024.
But the term "catch-up contribution" can be confusing to a lot of people. And one big misconception may be stopping you from pumping all the money you can into your IRA or 401(k).
You don't need to be behind to catch up
Catch-up contributions are designed to help older workers beef up their savings as retirement approaches. And that's an important thing, because many of today's workers who are 50 and older didn't have the same push to save for retirement independently in their 20s and 30s as today's younger workers.
Remember, it used to be pretty common to work for the same company for decades and collect a pension in return. Through the years, employers have increasingly shifted away from that model, leaving savers to have to pick up the slack on their own. And so the fact that catch-up contributions exist for IRAs and 401(k)s is a good thing.
But the term "catch-up" has the potential to be quite misleading. And you may be of the impression that you're not allowed to make a catch-up contribution if you aren't "behind" on savings.
That, however, isn't true. It doesn't matter if you have $2 million saved in your IRA or 401(k) versus $20,000. Once you turn 50, you're eligible to make a catch-up contribution in whatever account you're saving in. It's that simple. There are no income requirements related to catch-up contributions, nor is there the requirement that your current savings balance be below a certain threshold.
An option worth capitalizing on
It's worth putting extra money into an IRA or 401(k) for the tax savings alone. But remember, if you're in your early 50s, you might still conceivably have another decade and a half -- or more -- before you're set to retire. This means any extra funds that go into your savings might grow nicely via savvy investing.
As such, pay attention to what catch-up contributions look like each year, and aim to max out based on your age if you can.
