For people who have saved money for their retirement, the existence of the ‘catch-up’ contributions often gives solace to them. The benefits of these catch-up contributions allow the people 50 years and above to deposit the additional amount beyond the standard limit in the 401(k) retirement plan or other employer fund for retirement. It can protect the funds from those pre-tax earnings. For instance, in the year 2015, people with 50 years and above can hoard away $6,000 over the limitation of $18,000.
The design of the catch-up contribution was created by Congress in 2002 in order to encourage the older workers for more saving. A great number of those investors faced the collapsing of their portfolios following the trend of the dotcom bubble. According to the theory of this planning as reported by the Investment Company Institute, the older people would be more tend for this investment since they would wait more since they would not have to think about the expenses of buying their first home or children’s education.
But the reality is that the catch-up contributions seem not to provide anything as the cat-all solutions. From the survey of Matthew Rutledge from the Center for Retirement Research as he evaluated data from 1999 to 2005, usually a small fraction of workers are mostly likely to use these catch-ups. In fact, the estimation is only 9% of the entire people who had already contributed near to the maximum.
Apart from this survey, one can obviously hope that workers would think of increasing their contributions sooner or later almost reaching culmination and thus prefer to choose catch-ups. But you cannot forget that the so-call deferred limits are also increasing continuously. Therefore, it is the part of the struggle for the employees to keep up their earnings.
One problem with this 401(k) plan of catch-ups is differentiation of the tax benefits. According to the research of the 2015 Retirement Research Consortium, the problem of catch-ups center round the rising of tax incentives in accordance with the increasing income and an individual’s marginal tax rate. Therefore, the richer persons who have already large sum of money to save, are taking the advantage of catch-ups. On the contrary, for the lower income households such catch-ups are not so beneficial since they are less responsive about beginning with tax incentives as they have already lesser tax rates and probably have no such tax burden after the deductions and exemptions.
Another drawback of catch-ups is that these are only available for the people over 50 years of old who apply on a demographic by already saving more on the average. At the Retirement Research Consortium, Patrick Purcell from the Social Security Administration stated his opinion, “From the perspective of younger, lower-earning workers, the catch-up provision might appear to be both upside down and backward”.
Therefore, these reasons are leading to those people who are earning less or under 35 to incentivize something like Roth IRAs. Therefore, it is clear now that due to the existence of catch-ups, the saving strategies of the individuals are competing with each other. The working using catch-ups are just shifting their assets over saving plans by reallocating the contributions from the sources such as post-tax IRA to a pre-tax 401(k). Therefore, it is still not clear whether the ratification of catch-ups is leading towards a total increase in the employees’ retirement savings at all.