Yahoo Finance Is It Worth Making 401(k) Catch-Up Contributions or Should You Save or Invest That Money Instead?
According to an annual retirement study conducted by Allianz Life, 63% of Americans are more concerned about running out of money than death. These fears are fueled by soaring inflation, a worry about the lack of financial assistance from Social Security and higher taxes. This means that planning for retirement should be a greater priority as those close to retirement worry about having enough money saved up.
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Are Catch-Up Contributions Worth It?
Individuals over 50 at the end of the calendar year can make annual 401(k) catch-up contributions up to $7,500 for 2024. With the 401(k) contribution limit at $23,000 for 2024, eligible individuals can allocate $30,500 to this retirement account.
However, just because one can make such a contribution, does it always make sense? We will explore these scenarios in this 401(k) catch-up contributions breakdown. As always, the answer varies depending on your situation since there is no such thing as a one-size-fits-all solution for retirement planning.
Here are scenarios where these catch-up contributions are worth it.
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You Missed Out on Contributions When You Were Younger
You could’ve faced significant expenses when you were younger, such as saving up for a home and trying to raise a family. This could’ve put you in a situation where you fell behind on your retirement savings and are ready to get caught up now to make up for lost time.
“If you’ve fallen behind in saving for retirement, making catch-up contributions beginning the year you turn 50 can be a great way to get caught up fast,” said Todd Stearn, founder and CEO of The Money Manual. “It’s well worth reworking your budget to come up with that extra money. You can make these catch-up contributions through automatic withdrawals, just like your regular 401(k) contributions, so it’s not something extra you have to manage.”
You Want To Retire Sooner
With compound interest working on your side, your funds can grow faster, increasing your retirement nest egg as you put more money aside when you’re further from leaving the workforce. If you start making these catch-up contributions at 50, you’ll be able to build up your savings quicker so that you don’t have to work until you’re 70.
“Catch-up contributions have double benefits: they increase your retirement savings and reduce your taxable income,” said Erika Kullberg, an attorney, personal finance expert and founder of Erika.com.
This leads us to the next point.
You Want To Save Money on Your Taxes
Your catch-up contributions can reduce your tax liability today since they are made pretax. This would benefit you because you won’t pay taxes on the funds until they’re withdrawn in retirement. You may also be in a lower tax bracket when you make withdrawals since you’ve retired and are living off a limited income.
Kullberg shared the following example of how catch-up contributions could benefit you:
“Putting some extra money into a 401(k) or other IRA not only increases the size of your nest egg; if you make the contribution by the deadline, it also decreases your annual taxable income, potentially reducing your annual tax liability. For those in the higher tax brackets, an extra $7,500 contributed to a 401(k) could well reduce your taxable income at a rate of 25% or more, potentially saving thousands in taxes — which might be reinvested or saved in some other way.”
When Does It Make More Sense To Save or Invest the Money?
When should you look into other options like investing these funds into a high-yield savings account or a CD?
You Want Stability
Taylor Kovar, a CFP and CEO of 11 Financial, pointed out that investing in a high-yield savings account (HYSA) or certificate of deposit (CD) offers liquidity and stability. While taking advantage of catch-up contributions makes sense, you may not always feel confident about investing your money in the stock market or locking down your funds in a retirement account.
“As you draw closer to retirement, it can still be a great idea to put some of your money in low-risk investments like high-yield savings accounts and CDs,” Stearn added.
You Want Access to Your Funds
When you leave your funds in a savings account, you’ll have easy access if you have any major expenses coming up. There will be times in your life when you want easy access to your money due to specific circumstances. Leaving your money in a HYSA or a CD will also provide liquidity and less risk than investing in the stock market.
Is It Worth Making 401(k) Catch-Up Contributions or Should You Save the Money?
Trying to decide if you should make those catch-up contributions or save the money will depend on your personal circumstances and what your financial goals are.
Kovar concluded:
“Catch-up contributions provide tax-deferred growth potential and the opportunity to maximize retirement savings. The decision should align with the individual’s overall financial plan, considering factors like retirement goals, risk tolerance, and other financial goals.”
If you’re concerned about your retirement savings, you’ll want to make them a priority so that you can live a comfortable lifestyle in retirement without stressing about paying the bills.
“For those who are close to retirement, maximizing retirement savings can be a priority, and taking advantage of the tax advantages of the retirement account also makes catch-up contributions more appealing than a HYSA or CD with little to no risk,” Kullberg said.
As always, you’ll want to work with a financial professional who can assist you with making the best decision for your unique situation.
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This article originally appeared on GOBankingRates.com: Is It Worth Making 401(k) Catch-Up Contributions or Should You Save or Invest That Money Instead?
