Retirement Basics
An egg and money in a bird's nest with at $1 bill in the background
Catch-up contributions

You had every intention of socking away 15 percent of your salary each year to feather your nest egg. But somewhere between braces and college tuition for the kids, your personal savings fell short.

With less in the bank than you hoped for, you now face an unpleasant choice between living with less during retirement and remaining employed for a few extra years.

Luckily for you, there is another way.

Those who are or will turn 50 during the calendar year can often make additional catch-up contributions to their workplace savings plan or IRAs using pre-tax dollars.

They must first, however, meet the annual maximum allowable contribution limit for their retirement account.

"Most older baby boomers did not save for retirement early in their careers and many want to save as much as they can now," says David Wray, president of the Profit Sharing/401(k) Council of America. "Their 401(k) makes that easy."

Using catch-up contributions, he notes, retirement savers get all the advantages of the 401(k), including tax deferment, lower-than-retail fees and the employer match. Plus, they are able to make up for lost time.

Here are the maximum contributions you can make
IRAs (traditional and Roth) 2007$4,000 -- all workers
$5,000 -- workers age 50 or older
IRAs (traditional and Roth) 2008$5,000 -- all workers
$6,000 -- workers age 50 or older
IRAs (traditional and Roth) After 2008Maximum IRA contributions are inflation-
adjusted in $500 increments
401(k)s, 403(b)s, 457s,
SAR-SEPs 2007
$15,500 -- all workers
$20,500 -- workers age 50 or older
401(k)s, 403(b)s, 457s,
SAR-SEPs After 2007
Maximum employer plan contributions are
inflation-adjusted in $500 increments

How much can you save?

While most employees are eligible to defer up to $15,500 to a 401(k) plan in 2007 and 2008 (subject to cost-of-living increases thereafter), those eligible for catch-up contributions this year can defer an additional $5,000.

While employers are not required to provide for catch-up contributions, the vast majority do.

The same catch-up limits apply to 403(b) plans, 457 plans and SAR-SEP retirement accounts.

You can also contribute during the same year an extra $1,000 to a traditional or Roth IRA. So, while younger savers can put $5,000 a year into an IRA, people 50 and older can save $6,000.

Doesn't sound like much? Well, consider this: Imagine that someone has saved $25,000 toward retirement up to age 50. At that point, the person continues to save modestly in a 401(k) plan -- $6,000 a year -- and earns 8 percent interest. By the time the person turns 65, the account will be worth $245,000.

By contrast, if the same person saved the maximum allowed in the 401(k) -- including taking full advantage of the catch-up amount -- the retirement kitty would swell to $635,922 by age 65.

Additional maximum contributions (including catch-up contributions) to a Roth IRA would bring the total saved to retirement up to nearly $800,000.

For those who previously had not saved enough, catch-up contributions offer a second chance to secure a comfortable retirement.


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