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How Social Security Payroll ‘Tax Holiday’ Can Aid Retirement

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The new Social Security payroll tax holiday could be an opportunity to bolster personal retirement savings.

In 2011, most American workers will get a 2% boost to their paycheck thanks to legislation signed into law Friday by President Barack Obama. The “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” provides a Social Security “tax holiday” by decreasing the current payroll tax rate from 6.2% (of the first $106,800 in earned income) to 4.2% for one year.  

The Principal Financial Group’s Greg Burrows, senior vice president of retirement and investor services, says American workers who save rather than spend that extra 2% could potentially make a significant difference in their retirement nest eggs over time. For example, a 30-year-old earning $50,000 a year who defers an extra 2% into his 401(k) account over the next year would boost the weekly 401(k) contribution by a little more than $19. That amount could potentially grow to more than $16,600 (assuming an 8% annual return) by retirement at age 66.

“For Americans who can afford it, why not just put part or all of that 2% tax cut into your 401(k) or 403(b) account? It’s money you aren’t used to spending anyway,” Burrows says in statement.  “It may be just the amount to get closer to saving between 11% and 15% of pay. We believe most retirement plan participants should be saving in that range–including employer match–over the course of a career to have adequate income at retirement.” 

Workers, who are 50 years and older and already maxing out on their retirement plan contributions, could use the 2% as part of their catch-up contribution.   

“When Americans on average are saving about half of what they need for a secure retirement, any additional amount is a good thing,” he adds.