dcsimg
 
Advertiser Disclosure: Many of the savings offers appearing on this site are from advertisers from which this website receives compensation for being listed here. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). These offers do not represent all deposit accounts available.

Ask the expert: 401(k) catch-up contributions

September 14, 2010

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

Q: I'm 50 and will be taking advantage of catch-up contributions in my 401(k). How should I allocate the 401(k) contributions, though?

A: For 2010, the Internal Revenue Service is permitting 401(k) plan participants over the age of 50 to contribute an extra $5,500 to their 401(k) plans. This additional, or "catch-up" contribution is slated to continue, with cost-of-living adjustments, in future years. As the term "catch-up contribution" suggests, this is a way that older participants can try to make up for under-contributing and/or investment losses in prior years.

As for how to allocate these "catch-up" contributions, there is always a limit to giving that kind of advice in the abstract, but this is a good opportunity to review some principles of retirement plan allocation:

  • Match your investments with your time-frame. If your planned retirement is ten or more years off, your portfolio should have a healthy weighting of long-term investments, such as stocks and long-duration bonds. As your retirement date approaches, you should allocate more of your retirement savings to conservative vehicles, such as money market accounts, for stability and liquidity.
  • When considering your time-frame, look beyond your retirement date. As noted above, your retirement date should be a factor in determining your asset allocation, but don't look at it as the end-point of your investment program. After retirement, you may continue to live off your retirement savings for twenty years or more, so allocate the assets accordingly.
  • Set a course and stick to it. Determine an allocation based on your retirement date and long-term retirement needs, and don't make large changes in reaction to market ups and downs. Jumping in and out of the market can quickly throw a retirement plan off track.

If you don't feel comfortable making asset allocation decisions, see if your plan has any objectives-based or target-date options which will handle asset allocation for you within a single option.

Got a financial question about saving, investing, or banking? MoneyRates.com invites you to submit your questions to our "Ask the Expert" feature. Just go to our home page, and look for the "Ask the Expert" box on the lower left.

Your responses to ‘Ask the expert: 401(k) catch-up contributions’

Showing 1 comment | Add your comment
Machelle Croxen

26 September 2010 at 4:59 am

Now that's something worth reading. Thanks for sharing it with us!

Add your comment
(required)
(will not be published, required)