The Rules for Making IRA, 401(k) Catch-up Contributions

I’m going to be turning 50 in October. Can I make catch-up contributions to my Roth IRA and 401(k) anytime this year, or do I need to wait until after my birthday?

QUIZ: Are You Saving Enough?

You can start making catch-up contributions to your IRA and 401(k) anytime in the calendar year in which you turn age 50. In 2012, you can add $5,500 to your 401(k) above the $17,000 annual contribution limit, for a total of $22,500 for the year. You can add an extra $1,000 to your Roth beyond the $5,000 annual contribution limit, for a total of $6,000 for the year.

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Because they kick in at age 50, catch-up contributions give parents whose children are getting older a chance to start shifting money from college savings to retirement accounts.

The extra contributions can really help you catch up on your retirement savings, even in just 15 years. If you invest $22,500 in a 401(k) every year starting at age 50, you’ll boost your retirement savings by more than $525,000 by the time you’re 65, if your investments return 6% per year (see the calculator at Adding to Your 401(k) to run your numbers). Because the 401(k) contributions are pre-tax, investing $22,500 per year will lower your paycheck by only about $16,875 if you’re in the 25% bracket. The money grows tax-deferred until it is withdrawn in retirement.

If you invest $6,000 in your IRA during those years, you could amass more than $140,000 in your IRA in 15 years, assuming your investments return 6% per year. The money in a traditional IRA is tax-deferred until you withdraw it. If the IRA is a Roth, it can be withdrawn tax-free after age 59½ (see 2012 Retirement Account Contribution Limits for the income limits for contributing to a Roth).

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.