There’s Still Time to Contribute to Your Retirement Account for 2021
A retirement plan, if offered by your employer, can be one of the easiest and most effective ways to save for your retirement. One advantage of this type of account is the ability to automatically put a portion of your paycheck toward retirement. However, there are limits on how much you can contribute within a given year. In 2021, this limit was $19,500. For 2022, the limit has been expanded to $20,500.
If you’re like many people, and you didn’t contribute the maximum allowable amount in 2021, there’s good news. You can make last-minute individual retirement account (IRA) contributions between now and the April 18, 2022, tax filing deadline for the 2021 calendar year.
Why? Here are a few reasons to consider making additional retirement contributions:
- You can potentially lessen your 2021 tax liability.
- Additional contributions could help you qualify for the Saver’s Credit.
- Up to $6,000 in IRA contributions (and up to $6,500 if you are 50 years of age or older in 2021) can be deferred on your income tax filing requirement.
- After-tax Roth IRAs create tax-free retirement income. You pay your current tax rate on Roth IRA contributions. When you make withdrawals in retirement, these can be tax-free, too, depending on the situation.
- Contributions to traditional IRAs will grow, tax-deferred, until the funds are withdrawn. When withdrawn, the funds will be taxed at your current income tax rate. In retirement, your effective tax rate may be lower than during your working years. Penalties may apply for withdrawals made before age 59.5, and IRA distributions are forced at age 72.
- Roth IRA contributions are made with after-tax dollars, meaning the taxes are paid at your current tax rate. There are no forced withdrawals of this money, and when the funds are withdrawn, the taxes have already been paid.
- You can use a tax refund to fund your IRA. IRS Form 8888 allows you to put some or all of your tax refund in your retirement account.
For Individuals Age 50+ with 401(k)s
When you turn 50, you become eligible to contribute more money to these accounts, which can save you money on your annual tax bill. After turning 50, you become eligible to make catch-up contributions of up to $6,500 to your 401(k) plan. This is in addition to the maximum contribution limits referenced above laid out by the IRS. Individuals can make catch-up contributions at any time during the calendar year in which they turn 50, even if they have not yet reached their 50th birthday. These contributions allow workers to save more for retirement and may allow those who are behind the ability to catch up to their retirement goals.
To ensure you’re meeting the new maximum, check on the percentage of contributions that are being made to your account. You’ll likely need to make adjustments on your contributions to ensure you’re saving as much as possible.
Almost all retirement plans permit these catch-up contributions, but only 15% of participants take advantage of them when they’re offered, according to Vanguard’s analysis of retirement plans. It’s easier for those with high incomes and large account balances to make these contributions.
Roth 401(k) plans, if offered by your employer, are also eligible for catch-up contributions. These contributions won’t earn you an immediate tax break, but you won’t have to pay income tax on the growth of your investment in these accounts and will be able to make tax free withdrawals in retirement.
To learn more about these catch-up contribution opportunities and find out if they’re right for your retirement goals and plan, reach out to an Adams Brown advisor today.