The tax filing deadline is quickly approaching, and those who want to maximize their retirement plan contributions can still make a prior-year contribution for 2015 in their traditional and Roth IRAs. There is also an additional catch-up contribution available for IRA contributors who are age 50 and above. These additional contributions are allowed to help retirement savers who got a late start to defer additional money into these accounts so that they will be better prepared to face retirement when they stop working. And the difference that these additional contributions can make to your nest egg may surprise you.

Catch-Up Contribution Limits

Catch-up contributions are allowed in both traditional and Roth IRAs and qualified plans. Participants can contribute an extra $1,000 to a traditional or Roth IRA and an extra $6,000 to a 401(k), 403(b) or 457 Plan. The deadline for making catch-up contributions is December 31 for qualified plans, but taxpayers can still make these contributions to their IRAs for 2015 until April 18 of 2016. The levels of these catch-up contributions have increased substantially over the years; the amounts that were allowed in 2002 were only $500 for IRAs and $1,000 for qualified plans. (For more, see: 7 Top IRA Strategies.)

Those who eschew making catch-up contributions may end up missing out on more than they realize. These contributions can substantially add to your nest egg and help you to prepare for retirement. If you make traditional catch-up contributions, then you may be able to take additional deductions for them, although deductions for IRA catch-up contributions will be limited by your level of income if you also participate in a qualified plan. You can then use the money you save in taxes to make further savings contributions or pay off debts. If you make Roth contributions , then you won’t be able to take any deductions now but will be able to draw out the income with no tax consequence at retirement, provided that you have had some sort of Roth account open for at least five years when you begin taking distributions.

The growth from a $1,000 catch-up contribution can grow to $22,000 over 15 years for those who start making this contribution from age 50 to 65 and earn a 4% rate of return. A 6% rate of return would come to $26,000 and an 8% rate of return comes to $30,000. The amounts that can be earned by making the maximum possible contribution to a qualified retirement plan are much larger.  If you are 50 years old and start making the maximum $6,000 catch-up contribution in your retirement plan, then by age 65 you would have just over $130,000 at a 4% rate of return. A 6% rate of return would bring the total to around $154,000 and an 8% return comes to $182,000. (For more, see: How to Avoid IRA Sabotage.)

If you layer the IRA catch-up contribution on top of this, then your total additional savings would come to $153,000, $180,000 and $212,000 at 4%, 6% and 8% returns, respectively. Of course, if your spouse also works, then these amounts can double if he or she also maximizes their catch-up contributions. Having an extra hundred grand or two in the bank when you retire can go a long way towards rectifying your poor savings habits when you were younger.

The Bottom Line

Catch-up contributions can help you to boost your retirement savings during your most profitable working years. The additional amount that you can save using this provision can help you to make up for lost time in your retirement savings plan. For more information on catch-up contributions for your IRAs and qualified plans, download Publications 575 and 590 from the IRS website at (For more, see: 6 Essential Retirement Planning Tips.)



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