retirement

Catch-up contributions

Retirement » Basics » 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 or after-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, board member and past president of the Plan Sponsor Council of America.

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) 2014$5,500 -- all workers
$6,500 -- workers age 50 or older
401(k)s, 403(b)s, 457s, SAR-SEPs$17,500 -- all workers
$23,500 -- workers age 50 or older
SIMPLE plans$12,000 -- all workers
$14,500 -- workers age 50 or older

How much can you save?

While most employees are eligible to defer up to $17,500 to a 401(k) plan in 2014 (subject to cost-of-living increases thereafter, provided the COLI is at least $500), those eligible for catch-up contributions this year can defer an additional $5,500.

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 $5,500 a year into an IRA, people 50 and older can save $6,500.

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 just over $240,000.

By contrast, if the same person saved the maximum allowed in the 401(k) for 15 years -- including taking full advantage of the catch-up amount -- the retirement kitty would swell to a little more than

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

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