During our 30s and 40s many of us shortchange our 401(k) plans, contributing less than the maximum we’re allowed to each year and maybe even nothing at all. Being out of work for a time can be one reason. Competing financial demands, such as paying the mortgage, the kids’ orthodontist bills or you name it, can be another.
However, there’s something about turning 50 that tends to focus the mind on retirement. What once seemed like a far-off fantasy now looks like something that might really happen—and possibly within 10 or 15 years.
There’s nothing that we can do to go back in time and boost our contributions for, say, 2007. Fortunately, there are some ways to catch up a little. First among these is the aptly named “catch-up contributions” provision that applies to 401(k) plans and other tax-advantaged retirement accounts, including individual retirement accounts (IRAs).
Playing Catch Up with Your 401(k)
You’re eligible to make catch-up contributions to your 401(k) if you’ll be 50 or over at the end of the year. The maximum amount can change from year to year, based on inflation. For 2018 it’s $6,000, which is the same as last year.
However, the limit on normal contributions to 401(k) plans did rise for 2018, going from $18,000 to $18,500. Thus, for 2018 the grand total you can contribute if you’re 50 or over is $24,500. This assumes, of course, that you earned that much, can afford to contribute at that level and your employer’s plan allows it.
Bear in mind that if you have a working spouse with a 401(k) who’s also 50 or over, you can both do this, meaning that your combined maximum contributions for the year could reach $49,000. That grand total, incidentally, doesn’t include any additional amounts that your employers might kick in as part of a company match.
Consider an IRA
If you have the desire and the wherewithal to contribute even more than that to a retirement account, you might want to look next at an IRA. Here you’ll have two basic options.
Being eligible to make tax-deductible contributions to a Traditional IRA depends on two things: whether you’re already covered by another retirement account at work and what your modified adjusted gross income (MAGI) is. Your MAGI is the same as the adjusted gross income (AGI) that you report in your tax return, plus some additional adjustments. The IRS shows how to do the calculation on its website.
Assuming you have a 401(k) at work, you can make a fully deductible contribution to an IRA if your MAGI is $63,000 or less and a partially deductible one if it’s over $63,000 but under $73,000. Above that amount you can’t take any deduction. Those figures are for individuals; if you’re married and file a joint tax return, your collective income must be $101,000 or less for a full deduction and under $121,000 for a partial one.
For 2018 you can contribute up to $6,500 per person to an IRA if you’re 50 or over. That’s the regular maximum of $5,500 plus another $1,000 for a catch-up contribution.
If you earn too much income to qualify for a Traditional deductible IRA, a Roth IRA might be another option. With a Roth IRA you don’t get a tax deduction when you contribute money, but any funds you take out later will be tax free, including the account’s earnings. To qualify for tax-free withdrawals of earnings you’ll generally have to be at least 59½ years old and have had a Roth account for at least five years. There is also an exception if you become disabled before age 59½. Because you’re already paid taxes on them, contributions can be withdrawn at any time, which makes a Roth a particularly flexible retirement savings vehicle.
Roth IRAs have their own eligibility requirements, again based on income. To make a full Roth contribution, your MAGI for 2018 must be less than $120,000 for individuals and less than $189,000 for couples filing jointly. Reduced contributions are allowed for incomes under $135,000 and $199,000, respectively.
The maximum you can contribute to a Roth IRA for 2018 is the same as for a traditional IRA: $5,500 plus a $1,000 catch-up contribution for anyone age 50 and over, for a total of $6,500.
A Further Wrinkle for 403(b) Plans
If instead of a 401(k) you have its close cousin, a 403(b) plan, typically found at schools and nonprofits, you may get still another catch-up break. That’s because 403(b) plans can have both a catch-up provision similar to the one for a 401(k) and also allow employees with at least 15 years of service to make further contributions. Your employer’s benefits office or plan administrator should be able to tell you whether you’re eligible. The IRS website also has some basic information on the topic.