If you are like most Americans, you have woefully under-saved for retirement. But if you are still working and are 50 or older, you have an opportunity to catch up. Savers in company-sponsored 401(k) plans can make additional catch-up contributions every year once they turn 50. (Read More In “What Type Of Plans Allow Catch-up Contributions?”) The idea is to enable them to make up for the years they skimped on contributing to their retirement account and to address a huge problem in this country: a lack of retirement savings. Yet even though 401(k) catch-up contributions give people an opportunity to make up for their past savings sins, not everyone takes advantage of this tax incentive. They either don’t know it exists or don’t think they can afford it. But there are some real good reasons not to blow off the 401(k) catch-up. Here’s a look at five of them.
Not having enough money to live off of in retirement is a nightmare for most of us and a reality for many. Retirement can be long, and if you don't have enough saved, hard. Faced with a shortfall, most retirees have to overhaul their lifestyle to survive. A surefire way to prevent that from happening is to save more. The 401(k) catch-up provision lets you do exactly that. (Read More In “Do I Need To Hit My 401 (K) Contribution Limit.”) Even if money is tight, making the sacrifice to increase contributions now will pay off in the future when you will need the money more.
Taxes aren’t the main reason to take advantage of 401(k) catch-up contributions, but that incentive can help you save a lot of money in April when Uncle Sam comes knocking. Employees are allowed to contribute $18,000 to their 401(k) per year tax deferred. (Read More In “Not All Retirement Accounts Should Be Tax Deferred.”) Those over 50 can contribute an additional $6,000, bringing the deferred income to $24,000 a year. That translates into less you will have to pay taxes on. The more you contribute and the higher tax bracket you are in, the more you will benefit from 401(k) catch-up contributions.
One of the biggest enemies of saving for retirement is the manual nature of it. Study after study has shown that if you have to take the money out of your paycheck on your own and deposit it in a savings account, chances are it’s never going to make it there. That is why having your savings set on autopilot is always the best way to go. And a good automatic savings vehicle for people—particularly those over 50—is the 401(k) and its catch-up provision. You will barely miss the money if only a small amount comes out of your paycheck each pay period.
Most employers that provide a 401(k) plan offer some kind of match. For instance, an employer may match employee contributions by up to 6%. And while not every company is going to offer the same matching for catch-up contributions, some do. According to the Plan Sponsor Council of America, 97.1% of all 401(k) plans permit catch-up contributions, and 36% of plans match the contributions.
Employers want their workers to take advantage of the benefits and will go to great lengths to get the word out about their offerings. When it comes to the 401(k) catch-up provision, companies will let you know about the catch-up contributions and match when you come on board, during open enrollment and typically when you turn 50. And although that communications may not get an employee to boost his contributions, it should get him to think about his own retirement savings level. At first blush, lots of people say they are okay, but when they delve into their retirement savings and plan, they see a need to increase the amount they are contributing. (Read More In “7 Counterintuitive Retirement Strategies That Work.”)
Saving for retirement is one of the most important things people can do for their future, and yet lots of us don’t have even a fraction of what we need saved for retirement. As we get older, our earnings may increase, and we can make up for a savings mistakes by accelerating the amount that we put away for retirement. The 401(k) catch-up provision is one way to achieve greater savings and at the same time benefit from a tax break. But there are other benefits, as well. Your employer may match some or all of your catch-up contributions and you can do it automatically, which means you get to set it and forget about it instead of trying to save more on your own.