Since our podcast is 50 years old today, I thought we’d talk about things to consider when you turn 50. Let’s start with catch up contributions. The normal contribution limit 401k and TSP is $19,500 per year. But, if you turn 50 anytime this year or are you’re already 50 years old, you can contribute an extra $6,500. Those contributions can be traditional pre-tax contributions or ROTH contributions or a combination of the two as long as your total doesn’t exceed $26,000.
IRA’s have their own rules and limits. The 2021 IRAs contribution limit is $6,000 a year, plus the extra catchup contribution of $1,000, for a total limit of $7,000 a year, if your 50 and over. I want to point out that the rules for 401k/TSP are completely separate from IRAs. IRAs are available to everyone with earned income, and even their non-working spouses. So if your employer offers a 401k or TSP, and you are 50 or older, you can contribute up to $26,000 a year to that, $7,000 to and IRA for you, and if you have a spouse with little or no earned income, you contribute to an IRA for them as well. You spouse’s IRA limit would also be $6,000 if they are under 50, or $7,000 if they are over.
It’s also a great time to review whether you want to make ROTH or traditional contributions. The limits are the same for each, but they are taxed differently. I did a three part series in my podcast all about ROTH and Traditional retirement accounts. This would be a great time to go back and listen to those again if you have any questions about these confusing rules. The shows are: Episode 28 Meet ROTH, Episode 29 ROTH IRA, and Episode 30 To ROTH of NOT to ROTH. I’ll put links to those episodes in the show notes.
https://www.buzzsprout.com/934996/7264000
https://www.buzzsprout.com/934996/7366591
https://www.buzzsprout.com/934996/7503172
As you turn 50 your probably in highest earning years. And some of your expenses may be going down. Grown children may be moving out and finishing school. You may have paid off your mortgage or other debt. Now may be a good time to re-look you budget to find some more cash for retirement savings.
Here’s a couple of other thoughts about working and saving after 50. Lately I have been talking with some clients about the cost and benefit of carrying a mortgage right now. If you want to max out your retirement plan contributions, but don’t have the cashflow to do that, you might consider refinancing. Interest rates are very low right now. A lower rate, or maybe even a slightly longer time, might free up enough cash to maximize your retirement savings.
Another thing to look at is ROTH vs Traditional contributions. Just starting out in the workforce, it usually makes sense to make ROTH contributionsbecause, you are likely in one of the lowest tax brackets of your life. So tax wise this makes a lot of sense. As you get older, if you are earn more money and stepup into higher tax brackets the tax benefit is lessened. So if you hit fifty and don’t have the cashflow to max out your retirement savings contributions, you might consider switching from ROTH contributions to Traditional. Then use the amount that your taxes go down each year to increase you retirement contributions.
Your fiftieth birthday may be a good time to give your investment asset allocation a checkup. It’s not necessarily the time to radically reduce you risk, like putting the majority of your saving in bonds or TSP G or F funds. You may need those investments another 50 years. It's a good time to reassess your particular situation and have an allocation that can meet your needs when you retire and still work for you over the long haul.
Here’s to another great 50 episodes of podcasting together!
