401(k) catch-up contributions

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sampleQ: 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 2017, the Internal Revenue Service is permitting 401(k) plan participants over the age of 50 to contribute an extra $6,000 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 retirement 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.

Investments for retirement may include:

  • Stocks
  • Bonds
  • Money market accounts
  • Certificates of deposits

Look beyond your retirement date for proper asset allocation

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 for investments 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 savings 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.

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1 Comment
Machelle Croxen 26 September 2010 at 11:59 am

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