I’m creeping close to the big 5-0. Many say it’s one of the milestone moments and if you’re lucky it is sometimes accompanied by a grander than usual birthday celebration. Yes, you also get the often joked about AARP card. Sounds exciting right? Well, I found something even better to mark my 50th birthday. Are you sitting down? The gift comes from the IRS via the US government! In fact, if you are already over 50, you get it every year-you just need to act on it (with a few caveats, of course).
Back in 2001, as part of the “Bush Tax cuts” program, the IRS included a few improvements to traditional employer-sponsored retirement plans. First, the law was changed to allow employees to save into a ROTH account through their employer-sponsored plan. The ROTH option is still being adopted by employers, so if you have this option be sure to check out our blog on whether or not you should utilize it .
Besides the ability to use a ROTH, they also created a provision whereby older Americans could save even more for retirement, the so called “Catch-Up Provision.” This program, in reaction to the concern that not enough Americans have saved enough for their retirement, allowed folks over age 50 to save even more in their employer-sponsored plans. According to a 2016 Vanguard study “How America Saves”, adoption of the catch-up provision has been low. We can see that the trend has been increasing over the past few years, probably as result of the improved economy. However, as an advisor I continue to speak to people who are unaware or misinformed on just how much more they can save.
In 2016, you can contribute a maximum of $18,000 per plan year to your 401k, 403b, or 457b plan. Here’s the gift: If you are age 50 or older, you can also add up to another $6,000 per plan year via elective deferrals. So, you can turn your $18,000 in contributions into $24,000 just for reaching age 50 or older. Remember, it all goes in pre-tax too. It’s not too late, even for this month. Start by contacting the person who takes care of the day to day operations of your retirement plan- they’ll help you figure out how to defer the catch-up before the end of the plan year. If you can’t afford to do the extra $6,000, any amount below that is accepted. If you work in a position where you receive a bonus, this can be an excellent way to fund your catch-up rather than the potential of spending it foolishly.
IRAs and ROTHs Too
But wait, there’s more: If you don’t have a retirement plan through your employer, there is a catch-up for people over 50 on IRAs and ROTHs. For 2016, the maximum contribution per year is $5,500 and the catch-up provision is $1,000. So, you now can make a $6,500 contribution per year. This must be done by the due date of your tax returns. All IRA and ROTH contributions are subject to AGI phase out, so check with your CPA or Investment Advisor.
Turning 50 doesn’t seem too harsh after all. Not only do I have my AARP card to look forward to, but I get to put more away for my retirement! Do I really want that over the top 50th birthday party? Maybe I’m better off using the money towards my catch-up instead. Delayed gratification may be boring, but here’s hoping we all have more in our retirement.
The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Sean’s opinions and comments expressed on this site are his own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.