November 14, 2017

WTOP Interview: Boost retirement savings and reduce taxes with Catch-Up contributions

Catch-up contributions allow to supercharge retirement savings while reducing how much to pay in income taxes.
Dawn Doebler, CPA, CFP®, CDFA®

Interview Transcript:

Shawn Anderson: Well if you are saving for retirement and you are at 50 years old, you may be eligible to put away even more each year in your retirement plan through what's called a catch-up contribution. There are other advantages to consider beyond the extra income you'll have in retirement.

Hillary Howard: Let's go live to Dawn Doebler with The Colony Group in Bethesda and co-founder of Her Wealth. Hello Dawn.

Dawn Doebler: Hi Hillary.

Hillary: A lot of people don't even know what a catch-up contribution is, so why don't we begin there? 

Dawn: A catch-up contribution allows anyone age 50 and older to save even more into their retirement savings account. So, 2017 the contribution limit 401K plan or other company plans including the government TSP or solo 401K if you're self-employed is 18,000 and if you reach that level and you're over age 50 you can do a catch-up contribution of an additional $6,000. So that's another 33% above the regular contribution limit, and if you're not using one of those plans but you're using a regular IRA or Roth IRA and you reach the maximum in those type of plans of 5,500, you can add another $1,000 catch-up this year. These catch-ups can begin in the calendar year you turn age 50 and you can continue each year thereafter. We wanted to bring this to the attention of our listeners because the statistic show that less than half of those eligible, actually make these contributions.

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Shawn: Well how do your catch-up contributions impact our taxes and retirement savings?

Dawn: Shawn, my experience as an advisor has shown me that actually one of the biggest reasons people don't max out their contributions, is they really don't fully understand the tax saving and they think they can afford to make a contribution. So, I actually believe the vast majority of people can't afford not to maximize their savings. So let me give you an example, if you're in the 35% Federal tax bracket and you're adding $18,000 maximum plus a $6,000 catch-up, for a total of 24,000, that doesn't actually cost you $24,000. After tax the cost is actually only $15,600. So, in other words you might think it's costing you or that your paychecks going to decline by $2,000 per month, but it actually will only decline by about $1,300 per month and Fidelity calculated that actually, if you make these extra catch-up contributions of $6,000 starting at age 50, you can have about $1,000 per month of income during retirement. So it's really a substantial increase in your retirement income and it actually cost you less than you might think. 

Hillary: How long do we have to do this catch-up contribution?

Dawn: For company plans and TSP plans it’s only to be done before calendar year end. So there's still time but time is running out so don't delay and all the steps you need to take are in our article on herwealth.com and also on wtop.com. One pointer here, if you have a work plan you'll need to confirm that your plan allows catch-up contributions, that 97% of plan do, but there are some that don’t and then you can talk with your plan administrator or HR from there. If you have an IRA or a Roth you have until the tax filing deadline, so a little bit more time there but we really encourage you to maximize your contributions this year and if you don't get that done this year certainly figure that into your planning for 2018 it can make a really big impact on your retirement lifestyle. 

Shawn:  Alright Dawn thanks so much.

Dawn: Thank you.

Shawn: Dawn Doebler with The Colony Group in Bethesda, you can read more at wtop.com search, Her Wealth.

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Dawn Doebler, CPA, CFP®, CDFA®

Dawn’s experience spans more that 25 years providing wealth management, financial planning and corporate finance solutions for clients. As an MBA, CPA, Certified Financial Planner (CFP®), and a Certified Divorce Financial Analyst (CDFA®), she is uniquely qualified to understand the challenges and financial needs of clients from executives to entrepreneurs, as well as single breadwinner parents. Dawn is a weekly contributor to WTOP radio.