401K catch up

The government may allow a catchup. Your plan doesn't have to aloow it. It sounds like your plan doesn't allow it.

It sounds as if you were lead astray. There are contribution limits ($15,500 or 100% of comp for 2007) and there are catch-up contribs. Catch-up contribs are currently $5000. $20,500 can be deferred in 2007 if you are 50 or older and you earned at least that much in compensation. If you earned $17,500 (for example) your catch up would be limited to $2000.

If you were a highly compensated employee, your contributions may have been limited and the plan admin just did a poor job of explaining. Most employees do not have this problem however.

If your plan is a SIMPLE 401(k) it should be clearly identified on your statement. Otherwise ask your plan administrator. You should also have a plan servicing agent (he often comes around to do the enrolling). It has been my experience that the plan admin is often a company employee that had this role "dumped on them" and doesn't know jack about qualified plans.

I believe (read that, I am making a few assumptions, you'll see why) that each company has the right to make certain max limits in order to avoid 'top heavy' imbalances.

I work for a company whose max limit is 30% (so a $50K employee can max out the $15,000 deposit). The company allows the extra $5K for 50+ employees to come out at the same time, i.e. the 50K employee can have

JOE

I recently read that contributing more to a 401k closer to retirement might not be the "best" strategy. Compounding has less impact on savings. Increases RMD's. I think those were the two main points.

I see the advantage of the tax deduction (contributing more). But there could be a good case the money is best placed in a taxable account at ages when catch up contributions are allowed.

If I find a link, I'll reply and post it.

In 2001, the limit was 15% or the max fixed amount -- whichever was lower. In 2002, the law was changed so the % limit was removed and only the fixed amount applied. However, a plan can opt to have an even lower limit.

I'll keep am open mind, jIM, but this appears counter intuitive to me. Much of the value of the 401(k) or deductible IRA has to do with pre-tax money going in from one tax bracket, but coming out at a lower rate. Counting on that to occur is less certain over time, i.e. I know my rate now, and anyone's rate is knowable. As we've agreed here, we don't know what rate any of us will be in at retirement, with the exception of one poster's son who is aiming for the zero bracket. But if I were retiring this year, 2007, I would be able to max out my

JOE

If a plan offers a catch up provision, it must allow all eligible employees (age 50+) to add the same amount, and this catch-up contribution is completely separate from the other contributions in terms of limits, HCE testing, etc. But ... the plan is not required to have a catch-up provision.

So, if the plan did allow catch-ups, you were improperly excluded; if it did not, then you, and everyone else in the plan over age 50, were out of luck.

Here's a short (4 p.) article on the IRS Final Regulations (effective Jan

I read the PDF you linked to. The wording sounded pretty strong to me. It seems to me that a plan not allowing the catch-up may be violating the "universal availability rule". That the catch-up really isn't optional?

JOE

I read it as being optional, that an employer is not required to implement a catch-up policy. It was little cloudy in parts, but that's how I see it from that link. However, if the employer chooses to allow the catch-up then there is some "risk" that the universal availablity rule may come back to bite them unless they make provisions to make the program equal for all employees.

Don

That's the way I read it as well. Where "equal" meant same dollar amount.

"Most notably, an employer that offers catch-up contributions must make them available to all employees in all of its 401(k) plans who otherwise qualify." Implication - offering catch-up contributions is optional. (Followed immediately by a section entitled: "Why Should an Employer Offer Catch-Up Contributions", where "because it is legally required" isn't listed as a reason :-)

"This [universal availability] rule requires that all catch-up eligible participants be provided with the same 'effective opportunity' to make the SAME DOLLAR AMOUNT of catch-up contributions." Emphasis added.

Mark Freeland snipped-for-privacy@sbcglobal.net