401(k) Catch-up Contributions

Because of the exercise of stock options in 2007, I will be considered a highly compensated employee in 2008 and will only be able to contribute about $7,000 to my 401(k). However, I will also turn 50 in 2008. Will I still be able to make the additional $5,000 catch-up contribution?

The answer to your question is a surprising yes. Even though your regular 401(k) contributions are limited, the law allows you to make a catch-up contribution of up to $5,000 as long as you're 50 or older by the end of the plan year.

By law, companies cannot have a situation where highly compensated employees (currently those earning more than $100,000) contribute a lot more to their 401(k)s than the rest of the employees. Your employer may limit your contributions if you earn more than that, and you may not be allowed to contribute the full $15,500 per year to your 401(k).

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But you still can make the full $5,000 catch-up contribution, as long as you're 50 or older by the end of the year, if your employer offers catch-up contributions in its plan (most of them do), says Peggy Howell, senior compliance analyst with the Principal Financial Group, which administers many companies' 401(k) plans.

For more retirement-savings advice for baby-boomers, see The 40+ Life section of Kiplinger.com.

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.