If you’re in your highest-earning years you can make up for lost time.
By. Sandra Block for Kiplinger Personal Finance
YOU’VE no doubt heard from multiple sources (including Kiplinger) that the key to retirement security is to save early and often. Thanks to the value of compound interest, even small contributions to a 40l(k) or other retirement savings plan when you’re starting out will add up significantly over time. However, there’s math and then there’s reality. Young workers have multiple demal}.ds on their finances, from student loan payments to the rising cost of child care. It’s not unusual for individuals in their twenties and thirties to put their savings on hold, or limit the amount of their contributions, until those obligations begin to diminish and they reach their highest-earning years. But just as it’s never too late to start strength training, it’s never too late to save for retirement. Here are some strategies you can use to turbocharge your savings. CATCH-UP CONTRIBUTIONS The easiest way to ramp up your retirement savings is to make catch-up contributions to your 401(k) or other employer-provided plan. In 2024, if you’re 50 or older, you can contribute an extra $7,500 in addition to the $23,000 maximum 401(k) contribution, for a total of $30,500. If you have a traditional IRA or Roth IRA, you caq contribute an additional $1,000 beyond the standard $7,000 limit for those younger than 50, for a total contribution of $8,000 in 2024. If your employer-provided plan offers a Roth 40l(k) and most large plans do-consider dedicating at least a portion of your catch-up contributions to that account, especially if you already have a large balance in a tax-deferred plan. Although contributions to a Roth 40l(k) are aftertax, withdrawals are tax-free as long as you’re 59½ or older and have owned the account for at least five years. And you can contribute to a Roth 40l(k) regardless of your income level. By contrast, to be eligible to contribute the maximum amount to a Roth IRA in 2024, your modified adjusted gross income (adjusted gross income with certain deductions added.back) must be less than $146,000 if you’re single or less than $230,000 if you’re married and file jointly. Contribut10ns begin phasing out above_those amounts, and you can’t put any money into a Roth IRA once your income reaches $161,000 if you’re single or $240,000 if you’re married and filing jointly. Ip the past, you had to take required minimum distributions from Roth 40l(k) plans when you reached the age that triggers RMDs for traditional IRAs and 40l(k)s (currently 73). But the law known as SECURE Act 2.0, a broad package of changes to rules governing retirement and retirement savings plans, eliminated that requirement, effective this year. Starting in 2026, some workers who want to make 40l(k) contributions may have to put some of them in a Roth 40l(k), whether they like it or not. A provision in SECURE Act 2.0 will require workers age SO or older who earned $145,000 or more in the previous year to funnel catchup contributions to Roth 40l(k) plans. The change was originally scheduled to take effect this year, but the IRS postponed implementation of the rule after plan providers and employers-particularly those who don’t yet offer a Roth 401(k)said they needed more time to prepare. (For more, see “A Disappearing Tax Deduction,” Nov. 2023.) AFTER-TAX CONTRIBUTIONS If you’ve maxed out on catch-up contributions (or you aren’t yet old enough to make them), you may want to consider making after-tax contributions to your 401(k), assuming your employer allows them. In 2024, you can save up to $69,000 in combined employee and employer contributions, or $76,500 if you’re SO or older. Like contributions to a Roth 40l(k) (or Roth IRA), contributions are after-tax, but earnings are only taxdeferred; you’ll pay taxes on them at ordinary income tax rates when you take withdrawals. Given that, you may be wondering why you’d use this strategy instead of simply investing extra savings in a taxable brokerage account (which we’ll discuss later). Here’s why: With a strategy that has been dubbed the “mega backdoor Roth IRA,” you may be able to convert those after-tax contributions to a Roth IRA or, if your plan offers one, a Reith 401(k). Once the mon,ey is in a Roth, earnings will grow tax-free, and withdrawals will be tax-free as long as you’re 59½ and have owned the Roth for at least five years. And you won’t be required to take RMDs from the account. “That’s the promised land,” says Ed Slott, founder of IRAhelp.com. “It’s way better off than a brokerage account.” Now for the caveats, and there are quite a few. First, your plan must allow both after-tax contributions and what’s known as in-service distributions, which allow employees to withdraw funds from their plans while they’re still working. While the IRS permits after-tax contributions and in-service distributions, plans aren’t required to provide them. Only about one-fourth of companies allow aftertax contributions, although it’s more common among large employers. An even bigger hurdle is the IRS nondiscrimination rule, which limits the amount some high earners can contribute to their 401(k) plans. The IRS requires 40l(k) plans to pass certain tests to ensure that the plan doesn’t favor highly compensated employees over lower-paid workers.