Take Advantage of 401(k) Catch-Up Contributions When You Can
You may have heard somewhere, probably on an online ad, that it takes more than a million dollars to retire. Whether or not that is true (it is not), many people feel they are not putting enough money away to last throughout retirement. And even worse, some people feel they are so far behind, they will never be able to catch up. That may not be true either.
What is known as “catch-up contributions” have been a permanent part of the tax law since 2006. This enhanced saving opportunity was designed to help pre-retirees 50 and older stash even more into tax-favored accounts than the basic contribution limits each year.
Here is how the plan works:
First, you have to contribute up to the regular 401(k) limit, which is $19,500 in 2020. Once you hit that number, the catch-up contribution limit is another $6,500, bringing your potential 401(k) contributions to $26,000 for the year. These limits, by the way, are set by the Internal Revenue Service and adjusted for inflation on an annual basis.
Regardless of your age, here are a few tools to help you determine where you are and where you want to go:
- To help you determine the actual amount of what you have, use this online calculator.
- To help you determine the actual amount that you will need to save, use this online calculator.
- To help you estimate the amount that you have in social security benefits, use this online calculator.
We encourage you to take the results of the numbers and adjust your contributions into your 401(k) plan if possible. Almost all employers allow catch-up contributions in their 401(k) plans, and you can elect to make them at any time during the year by resetting the percentage of your salary you defer into the plan. For those eligible to save more, foregoing the catch-up is a missed opportunity.
There is a wealth of advice available to you on how to start and manage all of this. Check out Shelton Capital’s library of 401(k) Educational Videos to help you make good choices and stay on a good retirement track.
Here’s to your success!