Turning 50? Are you about to consider retirement? There are some special rule and laws that allow those closer to retirement to use catch-up contributions to better prepare for a better retirement. Many people who are working today have not really prepared for their retirement and are going to rely on Social Security as their main source of funds after they stop working. This is not an ideal situation and one that can be avoided if you plan properly starting now. No matter how old you are it is never too late to start saving, step up your savings to a higher level, or continue saving the way you are if that is at an adequate level to begin with. I personally do not expect much help from Social Security when I retire in about 25 years as I hope to wait until my full retirement age of 67 or if I am able to even delay my checks until I am 70 years old. That way I will increase my benefits 24% from the age 67 levels for an instant return on my money. That and I do not plan on retiring at 62, 65, or maybe even 67 as I love what I do but plan on doing more financial planning after I retire from my government job.
If you are over the age of 50 the first place you need to begin increasing your savings in your Individual Retirement Account or IRA. For everyone who saves in an IRA in 2014 they are allowed to save $5,500 on an annual basis. Here is where being over the age of 50 is key to saving the most as you are allowed an extra $1,000 in annual savings for a total of $6,500. The amount that is allowed to be saved in an IRA is set on an annual basis by the IRS and largely depends on the rate of inflation. As inflation was low the last few years the IRS has not raised the annual limit from 2013 to 2014.
401(k) accounts are also an area where people over the age of 50 are allowed a catch up contribution. For 2014 those under the age of 50 are allowed to contribute up to $17,500 in their work sponsored 401(k) or equivalent account. But just as with the IRA the IRS allows those over the age of 50 to contribute an additional $5,500 a year for a total of $23,000 on an annual basis. Also, just as with the IRA the IRS examines these funding levels on an annual basis.
For public sector workers there is a special savings tool and an example of this is a 457 plan. These allow a pre-retirement catch up where they are allowed double the maximum allocation for a period of three years prior to their normal retirement or up to $35,000 in 2014. This works well when people are paid large lump sums for un-used sick leave or annual leave that is paid upon retirement. However, you are not allowed to use this in addition to the normal catch up contributions. People who use some 303(b) plans are allowed to make extra catch up contributions after 15 years of service but these rules are tricky and it is best to consult a professional prior to trying to do these contributions.
I plan on examining the does and do not’s for those who are in their 50’s in the next few weeks. Until then if you have any questions or concerns feel free to contact me and I will be more than happy to help you in any way I can.