Only 13% catch-up rate seems low

[mickeyd]

http://www.investorsolutions.com/lc...5&NLstats=true&newsletterid=32&memberid=13387

A major provision of the Economic Growth and Tax Relief Reconciliation Act of 2001 is the 50+ catch-up provision. The catch-up contribution provision provides that, effective for plan years starting on or after January 1, 2002, certain retirement plans such as 401(k) plans and IRAs may permit participants age 50 and over to make additional "catch-up" contributions. Since 2002, catch-up contribution amounts have been rising steadily. Most plans reached the full increase in 2006. For 2007 and thereafter, the catch-up amount will be indexed for inflation.

 

[Outtahere]

I couldn't wait to hit 50 so I could put in the extra, problem is most people don't even put in the max never mind the catch up.

 

[mickeyd]

I agree. Other than a Roth IRA, this catch up deal is one of the best things that Congress has come up with in a while.  It is s no-brainer to dump in an additional $1K into an IRA once you reach age 50 and continue the pracrtice as long as you can.

I guess that there are only 13/100 of us acting on this no-brainer.

The other 87/100 must be waiting for a better deal.

 

[SteveR]

Another quote from this article:

"The problem is that most people are not taking advantage of this opportunity when they should. A recent study by the Vanguard Group showed that out of 2,000 401(k) plans, only 13% of the eligible participants made catch-up contributions. The numbers are even lower for IRA, just 6% made catch-up contributions according the Investment Company Institute.

It’s no wonder that the average 401(k) account balance of a 60 year old employee with a 30-year earning period is just $180,000 (from a 2004 study by EBRI).For retirees counting mainly on their 401(k) assets to get them through retirement, that could spell trouble. $180,000 is just not enough. If you want your asset to survive through retirement, an account that size can only generate an annual income of $9,000. Unless your retirement plans consist of living under a bridge and eating SPAM all day, I suggest you start fuelling your retirement dreams and take advantage of the catch-up provisions...."


DW and I are doing the full $5k per year additional contribution to our 401ks. It helps but it unless you have a long time before ER it won't help that much in the bigger picture. If one retires at 55 then you can only add an additional $25k per person to your 401k; and only $5k for a Simple IRA or Roth over that time. I guess if you still have another 15 years (age 65) to contribute it would make a much bigger difference. We are doing it to lower our current taxes since it is all pre-tax and to defer the taxes on the gain in these accounts until age 70.5.

 

[Andre1969]

One thing the example in that article shows is just how important it is to start young, so compounding work longer for you. In the example they use, where the one guy does the catch up but the other doesn't, the one guy ends up with $1,350,000 versus $1,200,000 for the other. They say it's "A whopping $150,000 difference". I'm actually looking at it as not that significant. It's a shame that they don't let you start "catching up" at a younger age.

Just imagine if they'd just let you put in $20K per year right from the start, versus at the age of 50. While not too many younger people could probably afford it, an extra $5000, starting at the age of, say, 20, would really compound into something incredible.

 

[mickeyd]

Jus

t imagine if they'd just let you put in $20K per year right from the start, versus at the age of 50.

Good point Andre. Of course, there is nothing stopping one form saving as much as you can afford in a taxable account. I truely believe that most of the folks that are saving in retirement plans at an increased rate would be investing in taxable accounts anyway, but realize that saving the same $ in a tax-favored account gets more bang for the buck.

 

[Andre1969]

That's what I'm doing, socking money away in taxable accounts, since I'm maxed out with the 401k. Looking back, I wish I'd started my 401k earlier in life, but once upon a time I had this fear of putting money away into something that I couldn't easily touch until I was close to 60. But I got over it.

FWIW though, I started my 401k back in late 1997, when I was 27 years old. So maybe I'm not too far behind.

BTW, what's the rationale for limiting the amount that someone can put into a 401k or IRA, anyway? Is the gov't just worried that some people would put away so much that it would completely wipe out their tax burden?

 

[SteveR]

Just imagine if they'd just let you put in $20K per year right from the start, versus at the age of 50.  While not too many younger people could probably afford it, an extra $5000, starting at the age of, say, 20, would really compound into something incredible.

I could not agree more. Of course it all boils down to politics and taxes. The Gov. wants your money now but will tolerate getting it later from your IRA but only because it has "metered" your contributions during your earning years.

It would be great to be able to save as much as you would like in a tax deferred account at an early age but I don't see it happening...too little tax paid out by the worker bees.

 

[Martha]

All of our over 50 lawyers are making the catch up contributions, though some get cut-off because they reach the max in the 401k/profit sharing plans.

Save a dollar now in taxes is their motto.

A number of our oldest lawyers are unlikely to ever need to tap into their 401k.  I find it odd that they still maximize their contributions.  Some are pushing up to the time when they are going to have to take RMDs.  I have joked with them about contributing to their 401k even while taking out RMDs. 

 

[mickeyd]

Is the gov't just worried that some people would put away so much that it would completely wipe out their tax burden?

Like all federal laws, the ones that Congress is able to agree on are a compromise between those who think it is a good idea to save as much as possible and those who believe that if the "wealthy" save too much (and get favorable tax treatment) it will somehow negatiely affect the "poor" and there will be less tax $$$ to spread around on their favorite projects.

I have never agreed that by restricting the amount of money that I have been able to save via tax-deferred plans has negatively affected the less fortunate amoung us.