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Catch-Up Contributions

posted Mar 16, 2016, 7:07 PM by Sam Neale   [ updated Mar 16, 2016, 7:08 PM ]

In 2016, on top of the $18,000 regular limit to a 401(k) plan, workers 50 and older can add $6,000 per year in catch-up contributions, which are aimed at helping individuals save enough for retirement.

Contributions are tax-free, but withdrawals are taxed as income in retirement. (Individual Retirement Accounts (IRAs) also allow catch-up contributions, but only at $1,000 per year, on top of the regular $5,500 limit.)

The additional 401(k) savings could amount to an additional $1,000 per month once a worker enters retirement, according to calculations done by Fidelity, one of the largest holders of retirement accounts.

Most employees, however, do not even come close to the regular limit, let alone put in extra.

According to new data from Fidelity, just 8 percent of its clients who are 50 and over make use of the catch-up program. Vanguard found in its last "How America Saves" report that 16 percent contribute.

While those numbers sound really low, Vanguard says there is a rosier picture in certain demographics. Among those 50+ who make more than $100,000 per year, the participation rate was 42 percent.

Income matters

If you make less than $100,000, maxing out a 401(k) and then adding catch-up contributions would mean saving more than 20 percent of earnings. But the national average of people who max out at the regular limit is just 9 percent, according to Fidelity.

Those easiest to reach may be the 10 percent of workers Fidelity found who max out the regular contribution but do not do catch-ups once they hit 50.

Unlike a Roth IRA, you do not become ineligible for a 401(k) as your income rises. While there is a bottom end of the income spectrum who opt for catch-ups, there really is no top. Somebody earning $300,000 is still considering a 401(k) strategy, but it is more about the tax benefit — not that they need to save more money."

Fidelity found that the average 401(k) balance of those doing catch-ups was $417,000, versus $157,000 for those who did not. That's a big difference and it's easy to see which account balance you'd rather have.

Contact A.D. Financial Planning, we can help you get started on saving for retirement or give you a second opinion on your current savings plan.


References: Catch-up contributions can put retirees way ahead. Retrieved March 16, 2016, from https://www.fidelity.com/insights/retirement/catch-up-contributions-help-retirees