What are 401(k) catch-up contributions?

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Retirement savers age 50 and older get to put extra tax-advantaged money into their 401(k) accounts than the standard annual contribution limits. Those additional savings are known as “catch-up contributions.”

 

If you have a 401(k) at work, taking advantage of catch-up contributions is key to making the most of your plan, especially as retirement approaches. Here’s a closer look at how 401(k) catch-up limits work.

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Related: How to open your first IRA

What Is 401(k) Catch-Up?

401(k) is a type of defined contribution plan. This means the amount you withdraw in retirement depends on how much you contribute during your working years along with any employer matching contributions you may receive (and how those funds grow over time).

 

There are limits on how much employees can contribute to their 401(k) plan each year as well as limits on the total amount that employers can contribute. The regular employee contribution limit is $19,500 in 2021 and $20,500 in 2022. This is the maximum amount you can defer from your paychecks into your plan unless you’re eligible to make catch-up contributions.

 

Under Internal Revenue Code Section 414(v), a catch-up contribution is a contribution in excess of the annual elective salary deferral limit. As of 2021 and 2022, the 401(k) catch-up contribution limit is $6,500. That means if you’re eligible to make these contributions, you would need to put a total of $26,000 in your 401(k) in 2021 and $27,000 in 2022 to max out the account. That doesn’t include anything your employer matches.

 

Congress authorized catch-up contributions for retirement plans as part of the Economic Growth and Tax Relief Reconciliation Act of 2001 ( EGTRRA). The legislation aimed to help older savers “catch up” and avoid falling short of their retirement goals.

 

Originally created as a temporary measure, catch-up contributions became a permanent feature of 401(k)s and other retirement plans following the passage of the Pension Protection Act in 2006.

Who Is Eligible for 401k Catch-Up?

To make catch-up contributions to a 401(k), you must be 50 or older and enrolled in a plan that allows catch-up contributions, such as a 401(k). The clock starts ticking the year you turn 50. So even if you don’t turn 50 until Dec. 31, you could still make 401(k) catch-up contributions for that year, assuming that your plan follows a standard calendar year.

Making Catch-Up Contributions

If you know that you’re eligible to make 401(k) catch-up contributions, the next step is coordinating those contributions. This is something with which your plan administrator, benefits coordinator or human resources director can help.

 

Assuming you’ve maxed out your 401(k) regular contribution limit, you’d have to decide how much more you want to add for catch-up contributions and adjust your elective salary deferrals accordingly. Remember, the regular deadline for making 401(k) contributions each year is Dec. 31.

 

It’s possible to make catch-up contributions, whether you have a traditional 401(k) or a Roth 401(k), as long as your plan allows them. The main difference between these types of plans is tax treatment:

  • You fund a traditional 401(k) with pre-tax dollars, including anything you save for catch-up contributions. That means you’ll pay ordinary income tax on earnings when you withdraw money in retirement.
  • With a Roth 401(k), regular contributions and catch-up contributions use after-tax dollars. This allows you to withdraw earnings tax-free in retirement, that’s a valuable benefit if you anticipate being in a higher tax bracket when you retire.

You can also make catch-up contributions to a solo 401(k), a type of 401(k) used by sole proprietorships or business owners who only employ their spouse. This type of plan observes the same annual contribution limits and catch-up contribution limits as employer-sponsored 401(k) plans. You can choose whether your solo 401(k) follows traditional 401(k) rules or Roth 401(k) rules for tax purposes.

401(k) Catch-Up Contribution Limits

Those age 50 and older can make catch-up contributions not only to their 401(k) accounts but also to other types of retirement accounts, including 403(b) plans, 457 plans, SIMPLE IRAs and traditional or Roth Individual Retirement Accounts.

 

The IRS determines how much to allow for elective salary deferrals, catch-up contributions, and aggregate employer and employee contributions to retirement accounts, periodically adjusting those amounts for inflation.

 

Here’s how the IRS retirement plan contribution limits for 2021 and 2022 add up.

Retirement contribution limits

These amounts only include what you contribute to your plan or, in the case of the defined contribution maximum, what your employer contributes as a match. Any earnings realized from your plan investments don’t count toward your annual or catch-up contribution limits.

 

Keep in mind as well that employer contributions may be subject to your company’s vesting schedule, meaning that you don’t own them until you’ve reached certain employment milestones.

The Takeaway

Putting money into a 401(k) account through payroll deductions is one of the easiest and most effective ways to save money for your retirement. To determine how much you need to put into that account, it helps to know how much you need to save for retirement.

 

If you start your contributions early, you may not need to make catch-up contributions, but if you’re age 50 or older, taking advantage of 401(k) catch-up contributions are a great way to turbocharge your tax-advantaged retirement savings.

 

Of course, you can also add to your retirement savings with an IRA. While a 401(k) has its advantages, including automatic savings and a potential employer match, it’s not the only way to grow retirement wealth.

 

Learn More:

This article
originally appeared on 
SoFi.com and was
syndicated by
MediaFeed.org.

 

SoFi Invest
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA  SIPC  . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.

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Guide to Bitcoin IRA: Pros, cons & what to know

 

A Bitcoin IRA (individual retirement account) is a self-guided retirement account that holds Bitcoin in its portfolio. Typically, most IRAs invest in stocks, bonds, or precious metals. A Bitcoin IRA invests in Bitcoin, and perhaps several different types of cryptocurrency.

 

There is no official designation for a Bitcoin IRA or Bitcoin Roth IRA by the IRS or any other regulatory agency—the term “Bitcoin IRA” simply refers to an IRA that includes Bitcoin.

 

Related: How to invest in Bitcoin

 

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A cryptocurrency IRA could provide some unique benefits, including offering overall portfolio diversification, and potentially unheard of price appreciation.

 

 

Grindi / istockphoto

 

Bitcoin provides a unique way to diversify an individual’s overall investment portfolio.

 

Given Bitcoin’s extreme outperformance of all other asset classes over the last ten years, it’s often said that Bitcoin is “uncorrelated” with the rest of the investment world. While that trend was upended in early 2020 as Bitcoin experienced a positive correlation with the S&P 500, some investors still consider it a more volatile investment.

 

whyframestudio / istockphoto

 

Given the unparalleled price appreciation bitcoin has enjoyed to date, along with the fact that cryptocurrency is an uncorrelated asset class and exists outside the control of any single centralized authority, some investors have wondered if it could be a reasonable retirement option.

 

There have been periods when Bitcoin traded in tandem with stocks, but from 2009 to 2020, Bitcoin has had over a 1,000,000% price increase (from less than $0.01 to more than $10,000). By comparison, the S&P 500 index provides an average return of 8% annually. That said, past performance is never a guarantee of future returns.

 

SKapl / istockphoto

 

There are also potential drawbacks to holding investments in a Bitcoin IRA, including both volatility and fees.

 

 

rockdrigo68 / istockphoto

 

Bitcoin has shown extreme volatility at times. This is one of the main reasons the asset class is considered risky by some, although this perception has begun to change recently.

 

The list of large corporations (like PayPal, Square and MicroStrategy) and self-made billionaires announcing large investments in bitcoin continues to grow. Successful billionaire investors like Paul Tudor Jones and Stanley Druckenmiller believe that Bitcoin’s overall value proposition outweighs its volatility.

 

Still, for investors with low risk tolerance, volatility could be a big drawback. Seeing investment funds fall by ten or twenty percent (or more) in a single day can be too much for some people.

 

David Shares on Unsplash

 

Perhaps the biggest and most assured drawback of investing in a Bitcoin IRA would be the fees involved.

 

Setting up an account alone could cost thousands. Every trade engaged in on an investor’s behalf could also come with fees in excess of 1% per trade.

And as with other IRAs, withdrawing funds before retirement results in additional fees and taxes.

 

Taken together, the final taxes and fees could eat into a portion of the profits and tax advantages earned by a Bitcoin IRA.

 

Andre Francois on Unsplash

 

The main way to invest in a bitcoin IRA is to use a trusted service provider that helps investors establish IRAs that hold Bitcoin.

 

There are some companies that have partnered with bitcoin custodial services like BitGo, for example, to help safeguard funds for investors—although these companies cannot guarantee against loss.

 

The specific process for starting a bitcoin IRA might vary according to which provider an individual chooses.

 

A Bitcoin IRA provider can help investors buy cryptocurrency to add to their portfolio while also safeguarding the funds for them.

 

Jirapong Manustrong / istockphoto

 

A cryptocurrency IRA works much like any other IRA. It’s a retirement account that invests in Bitcoin. The main difference for most customers is they will likely be interacting with three different entities:

 

 

Deposit Photos

 

These are the companies an individual will deal with when they want to add Bitcoin to their IRA. They are the financial rails through which assets will be converted into Bitcoin.

 

DepositPhotos.com

 

These are usually banks, credit unions, or brokerages that hold the assets in an IRA. Traditional IRAs invest in stocks and bonds, but self-directed IRAs allow investors to hold other assets like gold, real estate, or cryptocurrency.

 

Cn0ra / istockphoto

 

Typically, a Bitcoin IRA service will have a partnership established with a trusted wallet provider or custody solution that securely holds the private keys to a customer’s Bitcoin funds.

 

Stanislav Palamar/istockphoto

 

The answer to this question is “maybe, but probably not.”

 

401(k) plans generally don’t allow for the direct purchase of cryptocurrency. There are potential ways to roll over a portion of 401(k) funds into Bitcoin, but the easiest way might still be to use a self-directed IRA.

 

designer491 / istockphoto

 

The answer to this question depends on how a Bitcoin IRA company stores the private keys to an investor’s crypto.

It is widely acknowledged that to be truly safe, keys must be held off-line in cold storage and secured using some kind of multi-signature (multi-sig for short) method. This means that the funds can’t be accessed by any hacker on the internet, and that multiple access methods are required to retrieve any funds.

 

Multi-sig works kind of like a safety deposit box, where there are two physical keys—one held by the bank and one held by the customer.

 

Multi-signature security means that there must be at least two means of user verification before funds can be accessed. A basic example would be a customer having to answer emails from two separate email accounts.

 

More complicated methods might involve some kind of photo or voice identification in addition to multiple emails and an additional key held by the custodian of the funds.

 

peshkov/istockphoto

 

As far as investment gains or losses are concerned, investors will have to decide for themselves whether or not long-term bitcoin investing is safe in terms of their comfort level and their goals. The technology is only 11 years old at the time of writing.

 

There’s always a chance, however slim, that the project could fail. That said, the prospect of incredible returns seems to sway more and more investors.

Since 2009, the price of one Bitcoin in US dollar terms has risen well over 1,000,000%, making Bitcoin the best performing asset of the decade—and in history.

 

While past performance is never a guarantee of future outcomes, if this trend were to continue, it could potentially mean substantial returns for investors over the long term.

 

peterschreiber.media/istockphoto

 

A Bitcoin IRA or Bitcoin Roth IRA is an individual retirement account that holds bitcoin. Instead of a traditional IRA that holds stocks and bonds, a Bitcoin IRA is a self-directed IRA that can hold a variety of assets like gold, real estate, or Bitcoin.

 

In recent years, several service providers have stepped in to fill the market need for people wanting to add bitcoin to their retirement accounts. While the process is relatively straightforward, one of the major drawbacks that might turn many investors off could be the potential high fees involved.

 

Learn More:

This article
originally appeared on 
SoFi.comand was
syndicated by
MediaFeed.org.

 

SoFi Invest
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA  SIPC  . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
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