2 Reasons It Pays to Make Catch-Up Contributions in Your IRA

Pumping in extra money could benefit you in more ways than one.

Saving money for retirement is so important. The average senior on Social Security today collects just $1,827 a month. That's really not so much money when you consider the many different expenses you might have to bear as a retiree, from housing to groceries to healthcare.

That's why it's a good idea to steadily fund an IRA account. Not everyone has access to an employer-sponsored 401(k) plan. But if you have earned income, you can open an IRA and contribute up to a specific threshold that changes from year to year. 

This year, IRAs max out at $6,500 for savers under 50. But if you're 50 or older, you're allowed to make a $1,000 catch-up contribution to one of these accounts, bringing your total to $7,500.

Now, there tends to be some confusion around the term "catch-up contribution." You might assume that if you're not "behind" on retirement savings, you can't put in an extra $1,000. 

But actually, to qualify for a catch-up contribution, all you need to do is reach the age of 50. That's it. Your IRA balance has nothing to do with your eligibility. With that in mind, here are a couple of good reasons to make an IRA catch-up contribution this year.

1. You'll buy yourself more financial freedom for retirement

Retirement could end up being more expensive than you think. Recent Motley Fool research found that average yearly expenses for adults aged 65 and older are almost $49,000. 

Seeing as how the average Social Security beneficiary today only collects about $22,000 a year in benefits, it'll take a decent chunk of savings to make up that gap. So the more money you're able to pump into your IRA, the more spending power you'll get to enjoy as a retiree.

2. You can save money on your taxes in the near term

If you're saving for retirement in a Roth IRA, you won't get an immediate tax break on the money you put in. But if you're keeping your retirement savings in a traditional IRA, then the money you contribute will lower your near-term tax liability. And that could result in a lot of savings.

So, let's say you contribute $7,500 to your IRA this year. That's $7,500 of income the IRS will not be able to tax you on. And that's a pretty sweet deal.

If money has gotten tight this year due to inflation, which is the case for a lot of people, then you may not be able to make catch-up contributions in your IRA. But if you manage to find a way to squeeze out that extra $1,000, it could do you a lot of good. 

Remember, not only is that an extra $1,000 in contributions, but you get the option to invest your IRA funds and grow them into a larger sum over time. So if you put in an extra $1,000 this year, it might be worth five or 10 times that much down the line when accounting for investment gains.