How It Works
Contributions to a traditional 401(k) plan are limited to $19,500 in 2019. Those who are over age 50 – or who reach age 50 before the end of the year – may be eligible to set aside up to $26,000 in 2019.3
Setting aside an extra $6,500 each year into a tax-deferred retirement account has the potential to make a big difference in the eventual balance of the account. And by extension, in the eventual income, the account may generate. (See accompanying chart.)
Catch-Up Contributions and the Bottom Line
This chart traces the hypothetical balances of two 401(k) plans. The blue line traces a 401(k) account into which the maximum regular annual contributions are made each year, but no catch-up contributions. The green line traces a 401(k) account into which the maximum regular and full catch-up contributions are made each year.
Upon reaching retirement at age 67, both accounts begin making payments of $4,000 a month.
The hypothetical account without catch-up contributions will be exhausted by the time its beneficiary reaches age 83.
This hypothetical example is used for comparison purposes and is not intended to represent the past or future performance of any investment. Fees and other expenses were not considered in the illustration. Actual returns will fluctuate.
Both accounts assume an annual rate of return of 5%. The rate of return on investments will vary over time, particularly for longer-term investments.Contributions to and withdrawals from both accounts have been increased by 2% each year to account for potential 2% inflation.
Under the SECURE Act, in most circumstances, you must begin taking required minimum distributions from your 401(k) or other defined contribution plan in the year you turn 72. Withdrawals from your 401(k) or other defined contribution plans are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty.
2. Economic Growth and Tax Relief Act of 2001
3. Forbes, 2020. Catch-up contributions also are allowed for 403(b) and 457 plans. Distributions from 401(k) plans and most other employer-sponsored retirement plans are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Under the SECURE Act, in most circumstances, you must begin taking required minimum distributions from your 401(k) or other defined contribution plan in the year you turn 72. 6263 N. Scottsdale Rd #385 Scottsdale, AZ 85250 7, 63, 24, 6
Check the background of your financial professional on FINRA’s BrokerCheck.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. Some of this material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named representative, broker – dealer, state – or SEC – registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.
We take protecting your data and privacy very seriously. As of January 1, 2020 the California Consumer Privacy Act (CCPA) suggests the following link as an extra measure to safeguard your data: Do not sell my personal information.
Copyright 2020 FMG Suite.
Securities and investment advisory services offered through Woodbury Financial Services, Inc. [WFS] member FINRA/SIPC. WFS is separately owned and other entities and/or marketing names, products or services referenced here are independent of WFS.
No offers may be made or accepted from any resident outside the states where a financial advisor is licensed. Please contact the office for details.