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.