Turning 50 is a big deal. And if your 50th birthday is arriving this year, there's hopefully going to be some sort of celebration in the works.
But 50 is actually an important age in the context of retiring planning. So if you'll be 50 at any point in 2024, there's an important move to consider making.
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Boost your retirement plan contribution
Once you turn 50, you're eligible to make catch-up contributions in your IRA or 401(k) plan. Don't be thrown by the term "catch-up," since it implies that you're only eligible to put extra money into your account if you're behind on savings or have a low balance.
In reality, the amount of money you have in your retirement account doesn't matter. You could have $4 million and still be eligible for a catch-up contribution starting the calendar year in which you turn 50. So don't fixate on your balance, because it's only your age that matters.
With that in mind, if you're saving for retirement in an IRA, you can make a $1,000 catch-up contribution this year. If you have a 401(k), your catch-up opportunity is even greater -- you can put in an extra $7,500. However, if you're saving separately for healthcare expenses in a health savings account (HSA), know that catch-up contributions in those accounts don't begin until age 55.
Does it pay to make catch-up contributions?
Absolutely. First of all, the more money you put into a traditional IRA or 401(k), the more near-term income you get to shield from taxes. But also, if you're about to be 50 years old and not retiring for another decade-and-a-half or longer, the money you contribute this year has the potential to grow a lot.
Let's say you put an extra $7,500 into your 401(k) plan in 2024. If your 401(k) delivers an average annual 8% return -- which is a bit below the stock market's average -- that $7,500 will be worth $27,750 in 17 years, which may be around the time you're looking to retire.
That's just a single year's catch-up contribution. If you make a catch-up contribution every year between now and retirement, you have the potential to grow your savings substantially.
What if you've already saved a bundle?
Let's say you're reaching age 50 and you already have a few million dollars socked away in a retirement fund. If you'd rather spend $7,500 on updated furniture or a fabulous vacation instead of sticking it into your 401(k), that's your call.
You know what? You deserve to enjoy your money, so if you're ahead of the game with your savings, skipping out on catch-up contributions isn't the worst thing.
But if you're able to make a catch-up contribution while also getting the opportunity to spend on the things you love, then it pays to put that extra money into your retirement account. If you're at all unhappy with your current IRA or 401(k) balance and are worried about having enough money once retirement arrives, then it definitely pays to make catch-up contributions a priority, as soon as you're eligible to make them.
