Why the Rich Benefit Most from This 401(k) Tax Break

Americans don't save enough for retirement. That's hardly news, but even well-intentioned policies meant to incentivize saving don't always work as anticipated.

Take the so-called 401(k) catch-up provision, which lets workers 50 and older funnel additional tax-sheltered dollars into their plans. Great idea, right? But a new study by the Boston College's Center for Retirement Research finds that nobody really uses the catch-up option — except for the tiny percentage of high-earning workers who are already maxing out out their contributions.

The study analyzed the response of people saving for retirement to the addition of the catch-up provision in 2001. Researchers looked at savings behaviors before and after older workers got the chance to sock away an extra $1,000 in 2002, which rose to an additional $4,000 by 2005. (Contribution limits, both regular as well as catch-up, are adjusted for inflation. In 2015, the cap ticked up from $17,500 to $18,000, and the catch-up limit rose from $5,500 to $6,000.)

The investors who take advantage of the catch-up provision tend to be the few who can afford to max out their contributions in the first place. Since most 401(k) savers don't come close to hitting that limit, the distinction of being able to save $18,000 or $24,000 in a tax-deferred account is meaningless. Only about 3% of workers max out their contributions, according to a 2014 U.S. Government Accountability Office report. (And this entire conversation leaves out the vast number of low-wage workers who don't get any retirement benefits at all.)

Not surprisingly, the brief finds that people who do take advantage of the higher cap once they hit 50 tend to earn a lot more money than average. The Center's analysis found that those who maxed out their 401(k) contributions earned around $163,000, compared to an average of $57,000 across the board. Along the same lines, the top contributors had more than twice the net worth of the typical worker—an average $439,000 vs. $200,000.

Between 2001 and 2005, the older workers already maxing out bumped up their savings by 14%, on average, once they became eligible for catch-up contributions. By contrast, younger workers already at the limit boosted their deferrals by an average 7%, as regular contribution limits were adjusted for inflation.

Workers under the age of 50 who were maxing out saved nearly $1,200 extra, vs. $250 for the average worker. For workers 50 and over who were maxing out, the increase was even more dramatic—they saved about $1,700 more. "While this group does not increase their contributions all the way up to the new limit, they appear to be quite sensitive to tax incentives to increase their 401(k) saving," the brief says.

Unfortunately, most of the American workforce can't afford to take advantage of this perk. Still, even if you can't manage to max out, saving even a bit more can make a big difference. As an earlier study by the Center found, if you're 25 and start saving 10% a year (including an employer match), you'll be on track to comfortable retirement—if you keep up that till age 65. For those in their 30s, you'll need to put away at least 15%. (How much will I need to save for retirement? To see if you're saving enough for your goals, try this retirement calculator.)

What if you're a late-starting saver? If you're 45 and stash away at least 10% a year till age 70—yes, you'll need to work longer—you could still have a secure retirement, the researchers find. And catch-up saving, if you can manage it, will do a lot to speed that timetable.

Read next: 10 Reasons You're Not Rich Yet