Money Management

As you get closer to retirement age, you may want to take advantage of these special rules. 

You may have heard that the sooner you get started with retirement saving, the better. And it’s definitely true. Your investment dollars have far more compounding power if you start at 25 than 45.

While you might not have quite as much of a time advantage if you’re 50 or older, you do have one thing that younger investors don’t — the ability to save more in your retirement accounts. Virtually every type of tax-advantaged retirement account has a provision that allows older savers to set aside more money than the general investing population, and these are known as catch-up contributions. In a nutshell, catch-up contributions allow Americans to boost their savings in the years shortly before they reach retirement age.

With that in mind, here’s a quick rundown of the catch-up contribution rules for 2023 and what they could mean to your retirement.

Catch-up contribution rules by account type

IRA: For traditional and Roth IRAs, the 2023 contribution limit is $6,500, with an additional $1,000 catch-up contribution allowed for savers 50 and older.

401(k)/403(b)/457: The standard contribution limit for these account types is $22,500 in 2023 for elective deferrals, and individuals ages 50 or older can contribute an additional $7,500 for a total of up to $30,000.

SEP-IRA: Since all SEP-IRA contributions come from the employer, there is no such thing as catch-up contributions. However, the contribution limit for 2023 has risen to $66,000, or 25% of compensation, whichever is less.

SIMPLE IRA: The 2023 SIMPLE IRA contribution limit is $15,500 for employee contributions, with a $3,500 catch-up contribution allowed for participants over 50.

Catch-up contributions are about to get even better

The Secure 2.0 Act was recently signed into law, and among other changes to retirement savings, it is making some important changes to catch-up contributions. Here are the highlights:

The $1,000 catch-up contribution for traditional and Roth IRAs will begin to adjust for inflation annually, starting in 2024.A special (greater) catch-up contribution limit is starting in 2025 for participants of employer-sponsored retirement plans, such as 401(k)s. Savers ages 60 to 63 years old get a catch-up contribution limit of $10,000, or 150% of the standard catch-up limit, whichever is greater.The SIMPLE IRA catch-up limit will increase by 10% in 2024 and account owners 60 to 63 years old will get a $5,000 catch-up limit, or 150% of the standard amount, whichever is greater.

How much of a difference can catch-up contributions make?

Let’s say that you have a Roth IRA and decide to take full advantage of the catch-up contributions from ages 50 to 65 by contributing an additional $1,000. Based on a 7% annualized rate of return, those extra contributions would produce about $28,000 in extra retirement savings added to your nest egg compared with what standard contributions would produce. This could have a significant impact on your financial security in retirement. 401(k) and other account holders with higher catch-up limits could see a much bigger difference.

The bottom line is that if you’re 50 years old or older, it can be a smart idea to take advantage of catch-up contributions. You will create additional financial security for your retirement and can get larger tax breaks in the meantime.

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If you’ve been itching to refinance, now could be a solid opportunity. 

When mortgage rates plunged to record lows in 2020, many homeowners rushed to swap their existing mortgage loans for new ones. But not surprisingly, refinance activity slowed down in 2022 on the heels of rising mortgage rates.

This year, however, mortgage rates have been creeping downward. And for the week ending Feb. 3, mortgage refinance volume rose 18% compared to the previous week, according to the Mortgage Bankers Association.

If you’ve been thinking about refinancing your mortgage, now could be a decent time to do it given a recent drop in borrowing rates. Even though rates have the potential to keep dropping, you might benefit from refinancing sooner rather than later.

It could pay to refinance

We’re well past the days of mortgage rates sitting at historic lows. But that doesn’t mean you can’t reap some savings in the course of a refinance.

Imagine you’re able to refinance your 30-year mortgage at 6.2%. If you locked in your original home loan at 7.2%, you could save money on your payments by virtue of that lower interest rate.

But saving money on your monthly payments may not be your sole or even primary motivation for refinancing. Rather, if you have a major home project you’ve been trying to tackle, a cash-out refinance could allow you to tap your home equity and borrow more than your remaining mortgage balance to fund home improvements.

Let’s say you owe $275,000 on your mortgage, but you have enough equity in your home to qualify for a $325,000 cash-out refinance. If you sign that loan, the first $275,000 will go toward satisfying your existing mortgage balance. The remaining $50,000, however, will be yours to spend as you please.

So, let’s say you’ve been desperate to redo your kitchen because it’s cramped and you have little storage space. If you’ve been quoted $50,000 for a complete gut job, then your cash-out refinance could be an affordable way of funding that project.

Of course, in this situation, you could always go out and borrow a different way — for example, get a personal loan to finance your kitchen renovation. But you might snag a lower interest rate on a cash-out refinance than on a personal loan. And also, that way, you’re only paying off one loan at a time, as opposed to having to juggle multiple loan payments.

But what if rates keep dropping?

Any time you lock in a mortgage or a refinance, you run the risk of rates falling even more once your loan is put into place. But since we can’t predict what mortgage rates will look like a month or two months from now, you may want to look at refinancing while rates have dropped to a more affordable level.

This especially holds true if you have a major project that will improve your quality of life that you’re putting on hold. If your outdated kitchen makes your daily life miserable, and you can afford the payments that come with a cash-out refinance, then waiting is something you may not want to do.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Maurie Backman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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It should be a key part of your overall investing strategy. 

Investing in real estate isn’t for everyone, especially since there are some unique risks to consider. When you buy stocks in a brokerage account, there’s always the chance they’ll lose value. But if a given company you own encounters an unexpected expense, it’s not going to come after you as a shareholder and ask you to fork over thousands of dollars to deal with it.

When you own physical real estate, there’s always the chance that something will go wrong with your property, because that’s just what happens when you own a home. You could buy a rental property only to have the roof fail three years later, requiring a repair that’s going to have to come out of your pocket.

Despite the risks, investing in real estate can be a very lucrative prospect. And it can also be a great way to diversify. If your portfolio right now consists largely of stocks, exchange-traded funds, and bonds, buying real estate is yet another way to branch out and explore a different income stream.

But if you’re going to invest your money in real estate, it’s important to take the right approach. And it’s a good idea to heed the advice of one seasoned real estate investor.

Don’t plan to get rich quickly

Buying real estate in the hopes of making a quick profit is unlikely to work out well for you. A better bet? Plan to hold onto any income property you buy for many years.

In a recent tweet, real estate and investing guru Graham Stephan said, “If you’re investing in real estate, play the long game.” And the reason he says this is that real estate has a tendency to gain value slowly but steadily over time. If you sell too quickly, you might short yourself on profits or, worse yet, lose money.

Granted, between mid-2020 and mid-2022, U.S. property values soared. But that’s not what normally happens in the housing market. That trend was fueled largely by record low mortgage rates and the rush on the part of would-be buyers to capitalize on them.

Normally, home prices gain value slowly but steadily year over year. So if you want to make a nice profit on an investment property, you’ll need to be prepared to hold onto it for a long time.

Case in point: According to Federal Reserve data, the average U.S. home price during the third quarter of the year 2000 was $204,100. During the third quarter of 2019, before home prices started to soar, it was $382,700. That’s a big jump — but it certainly didn’t happen overnight.

A strategy to apply to your entire portfolio

Buying quality assets and holding them for many years is a strategy worth employing no matter what investments you’re considering. So whether you’re looking to put money into stocks or real estate, plan to buy and hold for as long as you can. Exercising patience could really pay off for you in the long run.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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It’s something you’ll hear often — but is it true? 

Whether you’re a low earner, a middle-income earner, or someone with a million-dollar paycheck, you probably feel the same way about taxes — you’d like to pay as little as possible. The good news is that the tax code is loaded with opportunities to help filers pay the IRS less money. Between credits and deductions, there’s a host of ways to whittle down your tax liability.

Now you’ll often hear that all of those tax breaks are designed to benefit the rich more so than lower-income households and average earners. But is that true? We asked Mark Steber, Chief Tax Information Officer at Jackson Hewitt, and here’s what he had to say.

Everyone has an opportunity to save money on taxes

It’s easy to see why some people might think wealthy individuals benefit more from tax breaks than those who aren’t. There are certain deductions that those with money are more likely to be able to use.

You can take a deduction on your taxes, for example, for money contributed to a traditional IRA account. If you don’t earn a lot, you may not be able to fund one of these retirement plans, whereas if you’re wealthy, doing so might be a lot easier. So it’s possible to argue that this specific deduction is more accessible to the wealthy.

Similarly, those who itemize on a tax return can deduct their mortgage loan interest. Lower earners are less likely to be able to afford to buy a home, so they may be less likely to get to claim this deduction.

Also, tax deductions themselves can be worth more money to higher earners than lower ones. The reason? A tax deduction, unlike a tax credit, exempts a portion of your income from taxes (whereas a credit is a dollar-for-dollar reduction of your tax liability). If you claim a $1,000 tax deduction and fall into the 22% tax bracket, that deduction may be worth less to you than it is for someone who falls into the 37% tax bracket.

On the flipside, though, “a lot of the tax benefits in the code are phased out for high-income tax filers,” says Steber. The American Opportunity Tax Credit, for example, which is a credit designed to help offset education costs, phases out for higher earners. If you’re single and earn more than $90,000, you can’t claim the credit at all. So clearly, in some cases, being a higher earner means losing out on tax breaks — not the other way around.

A system that’s designed to be fair

When it comes to tax breaks, “there’s something in [ the tax code ] for just about everybody,” Steber. “Tax benefits are not reserved for the rich by any means.”

If you’re eager to reap as much tax savings as possible, your best bet may be to sit down with a tax professional, review your financial situation, and find ways to minimize your IRS liability. In fact, it’s a good idea to meet with a tax professional outside of the tax-filing season so you can strategize on ways to eke out savings not just on a single return, but in general.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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