- If you're over age 50, taking full advantage of catch-up provisions in tax-advantaged savings accounts can help boost your income in retirement.
- Traditional and Roth IRAs and 401k(s) offer catch-up contributions for those age 50 and over.
- Even if you're on track with your retirement savings, tax-advantaged accounts can help you build more assets.
2021 catch-up opportunities
- Traditional and Roth IRAs: $1,000
- 401(k), Roth 401(k) or similar plan: $6,500
- SIMPLE IRA: $3,000
- Health savings account (HSA): $1,000
The notion that turning age 50 means starting to slow down is likely a young person's opinion. People who have hit "the big five-oh" know better. The prospect of retiring is getting closer, and there's a lot of living ahead. So it's important to ensure you have the money to live the life you've planned.
Fortunately, the federal government recognizes that people approaching retirement age often need to pick up the pace to ensure they have saved enough for retirement. The tax code provides "catch-up" savings opportunities so that people age 50 and older can increase their tax-advantaged contributions to IRAs, 401(k)s, and HSAs (starting at age 55).
Taking advantage of catch-up contributions can deliver a significant boost to your retirement saving. For example, if you turn 50 this year and put an extra $1,000 into your IRA for the next 20 years, and it earns an average return of 7% a year, you could have almost $48,000 more in your account than someone who didn't take advantage of the catch-up.1 And the impact can be even greater for a 401(k) or similar plan, where the catch-up contribution opportunity is larger.
Ready to start catching up with your retirement savings? Here's how:
1. Know if your retirement saving is on track
More than half of US households are at risk of not covering essential expenses in retirement, according to a recent Fidelity study of Americans' retirement preparedness.2 Some 41% of respondents have considered postponing retirement to make sure they can afford health care in retirement.
Are you on track? The first step is to find out how your savings—and savings rate—stack up. To get an indication of how prepared you really are, get your Fidelity Retirement ScoreSM. It takes about 60 seconds to answer 6 simple questions.
Whatever your score or your age, you can take some simple steps to stay on track or improve your retirement readiness. Fidelity Retirement ScoreSM can show you how adjustments to monthly savings, investment style, and other factors could impact your preparedness.
Tip: Want a more in-depth analysis of your retirement readiness? Visit Fidelity's Planning & Guidance Center.
2. Make the most of catch-up provisions
Once you reach age 50, catch-up provisions in the tax code allow you to increase your tax-advantaged savings in several types of retirement accounts.
- For a traditional or Roth IRA, the annual catch-up amount is $1,000, which boosts your total contribution potential to $7,000 in 2021.
- If you participate in a 401(k), Roth 401(k), 403(b), or similar workplace retirement savings plan, the catch-up opportunity is even greater: up to $6,500 a year. That means you can contribute up to $26,000 in 2021.
- Participants in a SIMPLE IRA or 401(k), designed for self-employed individuals and small businesses, can take advantage of a $3,000 catch-up contribution, bringing their total contribution potential to $16,500 for 2021.
3. Harness the power of tax-advantaged accounts
Even if you're on track with your retirement savings, tax-advantaged accounts are attractive long-term investment vehicles and tax-efficient planning tools.
With traditional IRAs or 401(k)s, contributions reduce your taxable income in the current year, as long as you are eligible, though withdrawals are taxable.3 These traditional accounts also offer tax-deferred compounding. With Roth IRAs, you pay taxes up front but withdrawals are tax-free when you reach age 59½, assuming certain conditions are met.3 Roth IRAs offer the potential for tax-free compounding. That means you'll have more tax-free money available to work for you than in a fully taxable account.
Tip: Compare IRA options—traditional or Roth—to see which might be right for you.
If your employer offers a high-deductible health care plan (HDHP) with an HSA, you may want to consider electing the HDHP and opening an HSA. HSAs have a unique triple tax advantage4 that can make them a powerful savings vehicle for qualified medical expenses in current and future years: Contributions, earnings, and withdrawals are tax-free for federal tax purposes.
To make the most of your HSA (if you have access to one and you can afford it), you may want to consider paying for current-year qualified medical expenses out of pocket, and letting your HSA contributions remain invested in your HSA. That way, the money has the potential to grow tax-free and be used to pay for future qualified medical expenses, including those in retirement.
For more on HSAs, read Viewpoints on Fidelity.com: 5 ways HSAs can fortify your retirement
Tip: Learn more about HSAs and consider opening a Fidelity HSA. Since HSAs are portable, you can transfer account balances in HSAs from any of your previous employers to a Fidelity HSA.5
4. Invest for the future
While regular contributions to tax-advantaged retirement accounts may help keep you on track to reach your retirement savings goal, your investment mix (asset allocation) is an important factor too. Consider whether investing a significant portion of your savings in a mix of US and international stocks and stock mutual funds may help you reach your long-term savings goals, since stocks have historically outperformed bonds and cash over the long term. You may want to think about gradually reducing the percentage of investments that you allocate to stocks as you get older. Employees who receive company stock through equity compensation plans should consider that in determining asset allocation and concentrated stock position risk.
Whatever your projected retirement date, your goal should be to have a portfolio with exposure to various types of investments that can provide the opportunity for growth and the potential to outpace inflation, along with investments that offer some degree of risk-reducing diversification. Of course, stocks come with more ups and downs than bonds or cash, so you need to be comfortable with those risks. You should always make sure that your investment mix reflects your time horizon, tolerance for risk, and financial situation.
Goal: Enjoy retirement
As you plan for the day you retire, taking full advantage of tax-advantaged savings accounts, including catch-up provisions, may help you arrive in a significantly stronger position to enjoy the retirement lifestyle you envision.
Next steps to consider
Take advantage of potential tax-deferred or tax-free growth.
Determine if you're contributing enough to your savings.
Learn 4 easy guidelines to help you reach your retirement goals.