Our Blog

Catch-Up Contributions

A recent survey found that 18% or people were very confident about having enough money to live comfortably through their...


catch up contributions gretchen stangier certified financial planner portland oregon

A recent survey found that 18% or people were very confident about having enough money to live comfortably through their retirement years. As the same time, 24% were not at all confident.¹

Congress in 2001 passed a law that can help older workers make up for lost time. But few may understand how this generous offer can add up over time.²

The “catch-up” provision allows workers who are over age 50 to make contributions to their qualified retirement plans in excess of the limits imposed on younger workers.

How it Works

Contributions to a traditional 401(k) plan are limited to $17,500 in 2014. Those who are over age 50 – or who reach age 50 before the end of the year – may be eligible to set aside up to $23,000 in 2014.³

Setting aside an extra $5,500 each year into a tax-deferred retirement account has the potential to make a big difference in the eventual balance of the account. And, by extension, in the eventual income the account may generate. (See accompanying illustration.)

Catch-Up Contributions and the Bottom Line

This chart traces the hypothetical balances of two 401(k) plans. The blue line traces a 401(k) account into which the maximum regular contributions are made each year, but no catch-up contributions. The green line traces a 401(k) account into which the maximum regular and full catch-up contributions are made each year.

Upon reaching retirement at age 67, both accounts being making payments of $4,000 a month.

The hypothetical account without catch-up contributions will be exhausted by the time its beneficiary reaches age 83.


catch up contributions chart gretchen stangier certified financial planner portland oregon

This hypothetical example is used for comparison purposes and is not intended to represent the past or future performance of any investment. Fees and other expenses were not considered in the illustration. Actual returns will fluctuate.

Both accounts assume an annual inflation rate of return of 5%. The rate of return on investments will vary over time, particularly for longer-term investments. Contributions to and withdrawals from both accounts have been increased 2% each year to account for potential 2% inflation.

Distributions from 401(k) plans and most other employer-sponsored retirement plans are taxed as ordinary income, and if taken before age 59 ½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70 ½, you must begin taking required minimum distributions.

¹ EBRI, 2014 Retirement Confidence Survey

² Economic Growth and Tax Relief Act of 2001

³ IRS, 2013. Catch-Up contributions also are allowed for 403(b) and 457 plans. Distributions from 401(k) plans and most other employer-sponsored retirement plans are taxed as ordinary income and, if taken before age 59 ½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70 ½, you must begin taking required minimum distributions.

Copyright 2015 FMG Suite

Back

DISCLOSURE: Investment advisory services are offered through Gretchen Stangier, Inc. DBA Stangier Wealth Management (“Stangier Wealth Management”), an investment advisor registered with the U.S. Securities and Exchange Commission. Stangier Wealth Management only offers investment advisory services where it is appropriately registered or exempt from registration and only after clients have entered into an investment advisory agreement confirming the terms of engagement and have been provided copies of the firm’s ADV Part 2A brochure and Part 3 documents.

DISCLAIMER: This website is for informational purposes only and does not constitute a complete description of our investment services or performance. This website is in no way a solicitation or offer to sell securities or investment advisory services except, where applicable, in states where we are registered or where an exemption or exclusion from such registration exists. Information throughout this site, whether stock quotes, charts, articles, or any other statement or statements regarding market or other financial information, is obtained from sources which we, and our suppliers believe reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Nothing on this website should be interpreted to state or imply that past results are an indication of future performance. THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION POSTED ON THIS OR ANY ‘LINKED’ WEBSITE.

You may also like

How Your Savings Account Can Become Your Retirement Redeemer

Many news stories and advisors lately seem to focus investment strategies as a surefire way for people to gain extra…

Eating the Estate Planning Elephant… One Bite at a Time, Part II

You may have been cohabitating with your proverbial estate planning elephant for some time now, but if the first part…

Finding the Right Financial Professional

So you’ve finally made the wise decision to work with an advisor. You realize that especially in today’s volatile environment,…