It’s easy to look at the possible contributions in a Self-Directed Roth IRA—or any other retirement account—and assume that these are flat limits. And they are, in many respects. But that doesn’t mean that your contribution limit will necessarily be the same as the next person’s. Why? Catch-up contributions are possible in many retirement accounts. And depending on your age, this can dramatically shift how much money you’re able to put away toward your retirement as you get older. But what are catch-up contributions, and how do they impact the Self-Directed IRA?
Defining the Catch-Up Contribution in the Self-Directed Roth IRA
First, let’s get clear about what a catch-up contribution is. In certain circumstances, the IRS allows more than the usual contribution limit to a retirement account, specifically when an investor has reached a certain age.
For example, there may be additional catch-up contributions in 2022 that greatly expand the ability of an investor over a specific age to put money away. For example, as Fidelity notes, 2021 catch-up opportunities within a Self-Directed Roth IRA were up to $1,000 for the year. This might not sound like much in the scheme of your retirement portfolio overall, but compared to the overall contribution limits, it’s a significant percentage increase as you advance in age.
This isn’t to say that catch-up contributions will advance as you age. It only triggers once for most accounts, assuming that the laws don’t change between the time this was written and the time you read this.
Why does the government allow catch-up contributions? It’s a way for investors who might be behind on their retirement plans to put aside a more significant portion of their income. Typically, people who stay in the workforce long enough also have increasing income as they age and acquire new experiences and skills. As you do this, you will likely be able to add contributions from a wider pool of income. The government allows investors to do so once they reach a specific age, typically over the age of fifty, or about ten years before reaching retirement age itself.
Should You Use a Roth IRA for the Contribution Limits?
The Roth IRA has a tremendous amount of benefits, but high contribution limits are not one of them. A Roth IRA is typically very independent, meaning that you don’t need to rely on a job to keep one of your own. You can also use self-direction to control what goes into your Roth IRA, including real estate, precious metals, tax liens, and more. This gives you a wide pool of potential asset classes to choose from, which in turn gives you the power to determine how your overall retirement portfolio works.
The Roth IRA also uses “after-tax” contributions, which means that once money is in the Roth IRA and handled properly, you won’t owe additional taxes on either your contributions or the growth within the account. Upon reaching retirement age, you become eligible to take that money out, tax-free, and use it how you like. This gives investors a tremendous amount of power if they’re able to make wise investments within a retirement portfolio that they hold in a Self-Directed Roth IRA.
If you’re interested in learning more about catch-up contributions, contribution limits, and how Self-Directed Roth IRAs work, you can find out more here at American IRA by checking out our Self-Directed Roth IRA page.