A woman looks at her 401(k) account statement to determine if she should make top-up contributions.
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Balancing payments are designed to help people save extra money in tax-advantaged retirement accounts after they turn 50 for a more comfortable retirement.
But what if you’ve already built up a sizable retirement nest egg, say you’re 55 with $1.2 million in a 401(k)?Making matching contributions may not be necessary, especially if you have other immediate financial needs, such as your living expenses or paying off high-interest debt.
Balanced investments can help you grow your 401(k) balance in the years leading up to retirement.
Catch-up investments allow savers age 50 and older to make additional contributions to tax-advantaged retirement plans each year. For 2024, an eligible saver can contribute an additional $7,500 to a 401(k), 403(b), or public savings plan. bringing their total annual contribution to $30,500.The IRS also allows people 50 and older save an extra $1,000 IRA.
Catch-up investments offer some attractive advantages. Pluses include the ability to get extra tax deduction for the current year and put larger amounts into accounts where balances can be invested and grown tax-free.However, it is important not to if you earn more than $145,000 in 2024Catch-up investments should be made with after-tax dollars, but if you need help figuring out how much you should put away each year for retirement, consider this financial advisor.
A middle-aged couple looks at their retirement savings as they consider making supplemental investments.
Despite these benefits, only 16% of eligible savers will take advantage of top-up investments in 2022, according to Vanguard’s annual How America Saves magazine. report 2023. Repayments may not make financial sense for everyone, including those struggling to make ends meet and those with high-interest debt.
For example, say you have $20,000 in credit card debt that carries an interest rate of 24% Credit card calculator shows that if you make a minimum monthly payment of $401, you won’t pay it off for more than 25 years and will pay $101,377 in total interest.
Now, let’s say you take the $7,500 you would have used to top up and use it to pay off your credit card balance instead.By spreading this amount over 12 months and adding it to your minimum monthly payments, you can pay off your balance in just two years. and pay only $5,600 in total interest.
Others can waive top-up fees if they’re already on track for a secure retirement.For example, imagine you’re a 55-year-old worker with $1.2 million in savings in a 401(k) using SmartAsset Pension calculatoryou can get a rough idea of ​​how your retirement income plan could be affected if you don’t pay.
By including your 401(k) but skipping the top-up contribution (assuming the contribution limits don’t increase), you could still retire with more than $2.1 million at age 65. Although that’s about $100,000 less than you would have After making 10. years worth of compounding investments, that would only result in about $5,000 less per year Depending on your projected expenses and desired lifestyle, this may not be that big of a deal for you.
These are rough calculations to show the potential difference in savings approaches financial advisor can gather more detailed and nuanced analysis as part of a financial plan.
However, a lot depends on your circumstances. If you don’t have immediate financial needs that supersede retirement savings, it may be a wise move. For example, having extra savings can help , if you are facing high volume medical expenses or long term care pension needs.
Balanced investments can be a big help for those who haven’t saved much for retirement by age 50. They may not be as helpful for those who are living on a tight budget or trying to pay off high-interest debt in a 401(k). A 55-year-old man with $1.2 million in savings may be able to forego his paid-up investments if he feels comfortable with the potential income his investment will generate. Savings in Retirement Then, having more savings will help them better cope with the unexpected expenses that can often arise.
If you’re saving for retirement using a 401(l), you must take required minimum distributions (RMDs) after age 73 (or age 75 if you turn 74 after December 31, 2032). the RMD calculator can tell you how much your RMDs will be.
Whether you’re trying to figure out how much you need to save for retirement or focused on minimizing your taxes in retirement, a financial advisor can help.Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisors to determine which one is right for you.If you’re ready to find an advisor to help you achieve your financial goals, start now.
Keep an emergency fund in an account that is not subject to significant fluctuations, such as the stock market allows you to earn compound interest. Compare savings accounts from these banks.
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