Retirement can be a complicated subject. From translating all the complex financial jargon to understanding how much you should save for your golden years, it can sometimes seem like trying to learn a foreign language.
And since finances are not always the most exciting topic, many people just do not know how to save for retirement. In fact, according to a Transamerica Center for Retirement Studies poll, two-thirds of Americans said they did not know as much as they should about retirement investments.
Although many people do not fully understand all aspects of retirement, researchers have discovered two factors, most of which are unaware that this could help them save more: catch-up contributions and credit.
What are the catch-up contributions?
Regardless of the type of retirement account you use (a 401 (k), a traditional IRA, a Roth IRA, etc.), the amount of your annual contribution is limited. For 2019, the annual contribution limit for 401 (k) s is $ 19,000. For IRAs, the limit is $ 6,000 per year.
However, if you are 50 or older, you can contribute more than that. With a 401 (k), you can pay an extra $ 6,000 a year, while ARIs save you $ 1,000 a year. These make-up contributions are intended to help older workers save more as they approach retirement age, but not everyone knows that they exist. According to the Transamerica survey, less than half of Generation X and only 63% of baby boomers knew that catch-up contributions even existed.
Part of the reason why so many people do not know about this incentive is that few workers are maximizing their retirement account. After all, if you save well under $ 19,000 a year with your 401 (k), you probably are not thinking of how to save $ 6,000 more and more. That said, if you can increase your savings and take advantage of catch-up contributions, your pension fund will thank you for it later.
For example, suppose you are 50 years old, your IRA is $ 50,000, and you are maximizing it by saving $ 6,000 a year. If you continue to save at this rate, assuming you realize an annual return of 7% on your investments, you will save about $ 289,000 at age 65. If you take advantage of catch-up contributions and you contribute $ 7,000 a year If all the other factors remain the same, you will save about $ 314,000 per 65. So, if you saved less than $ 100 more per month, that would represent $ 25,000 more over time.
What is the credit of the saver?
Not only can you save more for retirement with catch-up contributions, but you can also benefit from tax relief on these contributions with the credit of the saver – something of which only 38% of workers know about , according to the Transamerica survey.
With the credit of the saver, you can receive a credit of up to $ 1,000 a year (or $ 2,000 a year if you are married), depending on your income and your contribution to your retirement account. The maximum contribution eligible for the credit is US $ 2,000 per year (or US $ 4,000 per year in the case of a joint marriage), and you can receive a 50%, 20% or 10% credit of your contributions based on the salary you earn. year. Here are the limits for 2019, according to the IRS:
|Credit rate||Married Spouse Deposit||Head of household||Single, married separately or eligible widow|
|50% of your contribution||Adjusted gross income not exceeding $ 38,500||Adjusted gross income not exceeding $ 28,875||Adjusted gross income not exceeding $ 19,250|
|20% of your contribution||$ 38,501 – $ 41,500||$ 28,876 – $ 31,125||$ 19,251 – $ 20,750|
|10% of your contribution||$ 41,501 – $ 64,000||$ 31,126 – $ 48,000||$ 20,751 – $ 32,000|
|0% of your contribution||more than $ 64,000||more than $ 48,000||more than $ 32,000|
The credit of the saver is particularly advantageous for low-income people who have trouble saving, because the less you earn each year, the more you benefit from a significant tax break. And if you earn a penny, an additional $ 1,000 can go a long way – not to mention the strong incentive to contribute at least $ 2,000 to your retirement fund each year.
Retirement may not be the most captivating topic of your mind, but it's important to understand as much as you can about it. The more you know about these types of incentives, the easier it will be for you to boost your savings and enjoy a more comfortable retirement.