401k Catch Up Contributions

Well, in the early part of the decade Congress had determined that retirement savings levels were dismal at best and a lot of older Americans were facing a severe retirement shortfall (you can also see our article on the retirement shortfall for baby boomers for an example).

A major tax reform was signed in 2001 called the Economic Growth and Tax Relief reconciliation Act (EGTRRA) that tried to address this problem, among many others. One of the outcomes from EGTRRA allowed Americans who were age 50 or older by December 31st of a given year to contribute above and beyond the 402g limit. As the years have passed, this limit has increased. In 2008, a worker aged 50 or older can contribute an additional $5,000 to their retirement plan.

As such, the 401k catch up contribution limit does not count toward any other 401k contribution limits. In essence, a worker age 50 and over could contribute $20,500 in 2008. The overall 401k contribution limit is then $51,000 instead of $46,000.

If you are age 50 or older and have the ability to contribute that much to your retirement plan, you should do so. Take advantage of every last drop of tax and retirement savings that government is willing to allow. It will give your savings a much needed boost.

According to a 2007 study by the Profit Sharing/401k Council of America, 98% of employers allow their workers aged 50 and over to make 401k catch up contributions. The percentage of the over-age-50 population actually making catch-up contributions ranged from 17.9% to 42.3%.

Also, 31% of plans that allowed catch-up offered an employer match on those contributions. Check with your own employer for details, but don't let that make your decision for you. If you can make the catch-up contributions, then do it!