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Tuesday, September 15, 2009

401(k) Catch-Up Contributions

I learned something today that should be passed along to our Nelson team, especially those 55 and older or who will turn 55 in the near future. The IRS guidelines allow maximum contributions up to $16,500 per year. This "maximum contribution limit" changes almost every year and is a feature in the law that prevents 401(k) plans from becoming a wealth building tool for executives rather than a retirement plan for all employees.

If you're 55 and over you can also make additional annual deferrals known as "catch-up contributions." This feature allows older workers who may be behind in their retirement savings to contribute up to an additional $6,000 per year.

In our plan, and most plans, the methodology for maximizing your contributions was cumbersome. You had to separately elect catch-up contributions. Then as Plan Administrators we had to wait until you had contributed your $16,500 maximum before directing the Record Keeper to accept your additional payroll deductions as catch-up contributions.

I learned today that, among many technological advantages to or new Vanguard 401(k) arrangement, their system is smart enough to do all this for you. If you are 55 or older and have deferred a percentage of your salary that will exceed $16,500 annually the Vanguard system will automatically take all contributions after that point and consider them as catch-up. The system will then accept contributions up to $22,500 ($16,500 + $6,000) before stopping your deferrals.

As you plan for your retirement and consider accelerating your contributions, you can defer whatever flat percent of your base pay that will lead you to $22,500 and the Vanguard system will take care of the rest. Its one more reason that, at this early stage, I'm a happy Vanguard customer.

Jim

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