A comprehensive analysis of 401k catch-up contributions

If you are an employed person, saving has probably become an inherent part of your everyday existence. One can put funds aside in order to purchase their dream car, house, or trip. However, there is one thing we are all trying to save up as much as possible for – Retirement.

Inevitably, most people will have to retire and that is why they look for the most efficient ways to set their funds aside – and even more – for their savings to grow quicker. One way to boost one’s retirement savings is to take advantage of catch-up contributions.

About catch-up contributions – briefly.

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A catch-up contribution can be an essential element of a retirement plan. It is a particular type of retirement savings contribution intended for people aged 50 or older to contribute more to their 401(k) and individual retirement accounts. Making a catch-up contribution results in increasing your total contribution, furthermore surpassing the standard contribution limit.

The catch-up contribution provision was established by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), allowing older workers to save more cash for retirement.

The goal of implementing an additional catch-up contribution in your retirement savings plan is to make up for the years you didn’t save enough. Commonly, our income tends to get higher as we get older and therefore, we can put in extra money to our retirement savings account.

Catch-up contribution limits

Internal Revenue Service provides information about the catch-up contribution limit in the year 2022 for various retirement saving options. It is essential to include an appropriate method in financial planning before reaching full retirement age.

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Multiple types of retirement plans allow retirement savers age 50 or older to make an annual contribution. Each plan presents a catch-up opportunity of some sort. However, the amount of a catch-up contribution limit depends on whether it’s a traditional IRA or Roth IRA account, 401(k) plan, Simple IRA (for small businesses), or any other retirement plan.

IRS (Internal Revenue Service) informs that most saving plans enable 50-year olds to contribute, except for the Health Savings Accounts.

Unfortunately, these are meant for people aged at least 55 years. Keep that in mind while making significant financial decisions regarding your retirement funds.

Below we present you a list of current annual contribution limit, possible catch-up contribution limits, and the total amount of contributions for various retirement accounts.

Plan Type Contribution Limit Catch-Up Limit Total Limit

IRA/Roth IRA $6,000 $1,000 $7,00

SimpleIRA $14,000 $3,000 $17,000

401(k)/Roth 401(k) $20,500 $6,500 $27,000

403(b)/Roth 403(b) $20,500 $6,500 $27,000

457(b) $20,500 $20,500 $41,000

TSP $20,500 $6,500 $27,000

HSA individual $3,650 $1,000 $4,650

HSA family $7,300 $1,000 $8,300

DATA SOURCE: INTERNAL REVENUE SERVICE.

What are the benefits of catch-up contributions?

The catch-up contribution limit varies greatly depending on different plan types. Smartasset.com portrayed predictions of your estimated retirement assets with or without additional contributions. You can use our 401(k) calculator to see how much you can gain by making catch-up contributions. Assume you turned 50 this year and reached your individual 401(k) limit for 2020.

However, you do not make use of your catch-up contribution. Assuming a 7% annual return on your 401(k) investments, your account would grow to $20,865 by next year. However, if the total catch-up contribution is made, it will increase to $27,820. If you do nothing else but let your capital grow (at 7%) until you reach the age of 66, you have a balance of more than $82,000.

Furthermore, if your company provides some type of employer match on your contributions, you stand to gain even more. As previously stated, the maximum amount you can contribute to your 401(k) if you were at least 50 years old in 2020 is $26,000. The IRS refers to the funds you deposit into the account as “elective deferrals.” They are distinct from any employer match your company may provide.

The total amount of tax-deferred contributions to your 401(k) plus all other Defined Contribution plans from all sources is $57,000, or $63,500 if you’re 50 or older (in 2021). Typically, DC plans cover workplace retirement plans. If you are 50 or older, the maximum amount you can contribute to all of your IRAs in 2020, along with any other Roth options, is $7,000.

In today’s article, we would like to focus on a particular type of catch-up contributions – connected with 401(k) accounts.

Key takeaways:

  • What is a 401(k) account?
  • Different ways to catch up your retirement funds
  • An alternative solution for investing – The Infinite Banking Concept

Everything you need to know about 401(k)

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According to Investopedia definition, a 401(k) plan is a tax-advantaged retirement savings plan offered by many American employers. It is named after a section of the Internal Revenue Code of the United States, enforced by Internal Revenue Service.

When employees enroll in a 401(k), they agree to have a portion of each paycheck deposited directly into an investment account. Part or all of that contribution may be matched by the employer. The employee has the option of selecting from a variety of investment options, most of which are mutual funds.

The United States Congress created the 401(k) plan to encourage Americans to save for retirement. Tax breaks are one of the advantages they provide. There are two main options with entirely different tax advantages – Traditional 401(k) and Roth 401(k). Learn more about the 401(k) plan in our article: How to cash out your 401k without quitting your job

Various catch-up possibilities

Apart from regular contributions or catch-up contributions, there are a few ways to keep track of your retirement income and savings in order to make your retirement planning much more efficient.

Oversee your savings

According to a recent Fidelity study of Americans’ retirement readiness, more than half of US households are at risk of not covering essential retirement expenses. Forty-one percent of those polled have considered delaying retirement to ensure they can afford health care in retirement.

To avoid that situation, keep track of your income, savings and usual monthly expenses, and other factors to know, for sure, how much wealth you need to accumulate for your retirement.

Use tax-advantaged accounts

If you are already keeping up with your expenses, consider choosing tax-advantaged savings. They are appealing long-term investment vehicles and tax-efficient planning tools. The available tax-advantaged accounts include already mentioned Traditional and Roth IRAs, 401(k) and many other retirement account options.

Capitalize on catch-up provision

As we described, annual contributions may be fortified with catch-up contributions. Achieve better future results by taking advantage of possible options. Contribute and boost your income in retirement.

Investing

Asset allocation can be a crucial method for managing your personal finance. Gain your goal by making use of catch-up contributions, tax-advantaged options and investing possibilities. Personal finance diversification may speed up the process of accumulating retirement funds, and that way, you may be able to retire earlier.

Invest in your future – join The Infinite Banking Notion

Traditional methods and catch-up contributions do not have to be your only option. The Infinite Banking Concept enables the funds needed for you to fulfill your wishes. Learning how to manage your assets according to the rules of Infinite Banking creates a new world full of possibilities where nothing is out of your financial reach.

Infinite banking allows you to imitate how a traditional bank operates and borrows money, but without the need to depend on a third party. You will be both a creditor and a lender.

Instead of borrowing from a bank, you borrow money against yourself and singlehandedly dictate cash flow while still allowing your whole life insurance policy to earn dividends (money) even though you are using these funds elsewhere. In other words, you build wealth while borrowing and repaying the capital held in the cash value of your permanent life insurance policy.

That being one of the most significant advantages of the whole life insurance policy, you will never have to deal with banking fees or interest rates on loans. As a policyholder, you can borrow money using your own policy’s cash value. Using this borrowing setup, you would never have to borrow from a bank again and instead would borrow for yourself (your whole life insurance policy) and pay yourself back over time. Thus, being your own bank.

The goal of Infinite banking is to duplicate the process as much as possible to build the value of your own bank. The duplication process happens by lending and repayment of money typically held in the cash value of a permanent life insurance policy.

Infinite banking allows you to better work towards your individual and unique financial goals for yourself and your family and have control over your finances without dealing with banking fees or interest rates on loans.

Infinite Banking involves:

  1. Overfunding (with after-tax funds) a high cash value whole life insurance policy from a life insurance company
  2. Accumulation of Cash Value(tax-free) throughout the years you are a policyholder of your Whole Life insurance policy
  3. Tax-Free Loans taken out against your whole life insurance policy’s cash value to use for your financial expenses.

By the process of borrowing for yourself, repaying, and so on – simply by being your own bank, you earn the financial freedom and control of your money.

Implementing this banking strategy into your life gives you much better control over your finances and helps you build wealth using the life insurance policy.

Final thoughts

We hope that we have helped you get more familiar with 401(k) catch-up contributions. Catch-up contributions can be a solid strategy to increase your retirement funds and enable you to retire much earlier.

However, if you want to invest in your future and gain financial freedom at the same time – consider implementing Infinite Banking in your retirement planning.