Many investors fail to take advantage of the opportunity to make catch-up contributions to retirement accounts -which may not be a good idea, as they can make a significant difference in retirement wealth.
Investors age 50 or older as of year-end can make catch-up contributions to 401(k), 403(b) and 457 plans as well as traditional and Roth IRAs.
Maximum catch-up contributions for the 2010 tax year are $5,500 for 401(k), 403(b) and 457 plans and $1,000 for IRAs.
How much extra could you accumulate by making catch-up contributions? Quite a bit.
Let’s say you turn 50 in 2010 and contribute an extra $5,500 to your 401(k) plan for 2010 and the next 15 years, until you reach age 65. At a 4% annual return, you’d end up with an extra $120,000.
At a 6% annual return, you’d end up with an extra $141,000. And with an 8% annual return, you’d end up with an extra $167,000, according to The Wall Street Journal.
Additionally, let’s say you turn 50 in 2010 and contribute an extra $1,000 to your IRA for 2010 and the next 15 years, until you reach age 65. At a 4% annual return, you’d end up with an extra $22,000.
At a 6% annual return, you’d end up with an extra $26,000. And with an 8% annual return, you’d end up with an extra $30,000, also according to The Wall Street Journal.
Married? If your spouse can make catch-up contributions as well, you could potentially double the amounts shown here as a couple.
As you can see, making catch-up contributions can potentially add up by the time you reach retirement age – so they’re worth considering.
Of course, these examples are hypothetical and are not intended to represent any particular product. Contact your financial advisor to determine how much you could accumulate with catch-up contributions.