Catch
Up on Retirement Savings
According
to a recent survey, 40 percent of households headed by workers nearing
retirement don’t have enough money to replace even half of their
pre-retirement income.1 Fortunately, for those
aged 50 and older, the federal government has provided a chance to “catch
up” on retirement savings.
Employer
Plans
This year, contribution limits for employer-sponsored retirement plans rose,
boosting the tax-deferred savings potential for many workers.2
Participants in 401(k) and 403(b) plans can now contribute $12,000 a year, up
from $11,000 in 2002.
For those aged 50 and older, a special catch-up provision makes even greater
savings possible. Catch-up contribution limits doubled to $2,000 in 2003,
enabling those nearing retirement to contribute up to $14,000 a year to their
employer-sponsored savings plans.
Contribution limits for all 401(k) and 403(b) investors will continue to rise by
$1,000 a year between now and 2006, when they’ll cap at $15,000. Catch-up
limits will follow the same pattern, rising $1,000 a year until 2006, capping at
$5,000. During the next three years, contribution limits for salary-reduction
SEPs (SARSEPs), 457s, and SIMPLE plans will also increase.
IRAs
Last year, contribution limits for IRAs rose from $2,000 to $3,000 for all
investors. For those aged 50 and older, another $500 in catch-up contributions
can be made, for a total of $3,500 each year. Limits are set to rise to $4,000
in 2005 and $5,000 in 2007. Annual catch-up limits will remain steady at $500
until 2006, when they will jump to $1,000.
Taking advantage of these increased contribution limits not only increases plan
participants’ tax-deferred savings potential, but it can also help shrink
their tax bills through pre-tax and tax-deductible contributions.
The last few years have been challenging for many retirement-minded investors.
If you feel that your retirement savings may be lacking, now could be a good
time to “catch up.”
1) Los Angeles Times,
May 3, 2002
2) Distributions from traditional IRAs and employer-sponsored retirement plans
are taxed as ordinary income and, if taken prior to reaching age 59½, may be
subject to an additional 10 percent federal tax penalty.
©
2002 Emerald Publications
