BOSTON (CBS) – Congress realized a couple of years back that most workers will not have enough retirement savings set aside for their golden years. And Congress does not want to be responsible for taking care of us in our old age if we are poor.
Think about the 76 million Boomers coming along. The oldest turned 65 this year and many are already receiving early retirement benefits from Social Security.
Laws were changed to increase the amount workers could contribute to their retirement plans. But then Congress realized that older workers close to retirement were in rough shape. They define older as anyone over 50. So they passed another law allowing catch-up contributions for anyone over age 50.
Workers over 50 can contribute an extra $5,500 this year to their 401(k), 403(b), 457 and self-employed 401(k) plan. If your employer’s plan allows the catch-up and if you have the extra cash you could max out your contributions at $22,000 this year. Both the 403(b) plan and the 457 plan have an additional catch-up provision as well.
According to a recent study, less than 6% of workers take advantage of the catch-up provision. Congress thought this was a good idea. Duhh……….. Where did they think workers were going to get the extra dollars?
Most families are stretched so thin that they cannot afford to max out their current retirement plans. And some employers chose not to include the catch up provision in their retirement plans due to the administrative costs. This is especially true with companies that have a young workforce and high turnover rate.
If you are contributing to a SIMPLE IRA and are over 50 and can afford the catch-up you can add an additional $2,500 this year to your account. There is no catch-up for a SEP IRA.
The catch up contributions for all other IRAs is a $1,000 this year.
The catch-up provision could be a great tool, but you need to have the extra cash available. If you are a two-income family and you are both over 50 and can live more or less on one income start maximizing your retirement plans and use the catch up provisions.
For example, and I am always doing examples, if you and your spouse start maximizing your 401(k) plans and do the catch up that means you are saving $44,000 a year. And if you are in the 25% tax bracket you will save $11,000 in Federal taxes.
If you can do this for 5 to 10 years you will build up your nest egg quickly. $44,000 contributed over 10 years; with an average return of 7% you could have over $600,000 in that nest egg. Having a comfortable nest egg allows you choices in retirement.