Maximizing Your 401(k) Contributions

January 17th, 2020 – As the New Year approaches, it’s a great time to reflect on your financial goals and make a plan for the future. A cornerstone of that plan is often a 401(k) retirement savings account. But are you contributing as much as you could be? Many people don’t realize the potential to significantly boost their retirement savings through strategic contributions. Let's dive into how you can maximize your 401(k) and build a more secure financial future.

Understanding Your 401(k)

A 401(k) is a retirement savings plan offered by many employers. The key benefit is the ability to contribute pre-tax dollars, meaning your money grows tax-deferred, and you don't pay taxes on the earnings until you withdraw the funds in retirement. This can have a huge impact on your long-term savings.

1. Employer Matching – The Free Money!

This is the most important factor. Many employers offer a matching contribution, effectively giving you "free money." For example, your employer might match 50% of your contributions up to 6% of your salary. Always contribute enough to get the full employer match. Failing to do so is like turning down a significant bonus. Think of it as a guaranteed return on your investment.

Example: If your salary is $60,000 and your employer matches 50% of your contributions up to 6% of your salary, that’s$ 3,600. Contributing 6% ( $3,600) would result in a total of$ 7,200 saved in your 401(k).

2. Contribution Limits – Know Your Numbers

The IRS sets annual contribution limits for 401(k) plans. For 2019 (as we're discussing this in January 2020), these limits are:

Employee Contributions: $19,500 (or$ 26,000 if age 50 or older – catch-up contributions).
Total Contributions (Employee + Employer): $69,000 (or$ 75,000 if age 50 or older).

It's important to check the current limits as they change annually.

3. Catch-Up Contributions – Don't Miss Out!

If you’re age 50 or older, you can make catch-up contributions. This allows you to contribute an extra amount to your 401(k), boosting your savings significantly. As mentioned above, this adds an extra $6,500 in 2019 for those 50 and over.

4. Tax-Advantaged Strategies

Roth 401(k): Consider a Roth 401(k) if you anticipate being in a higher tax bracket in retirement. With a Roth 401(k), you contribute after-tax dollars, but your withdrawals in retirement are tax-free.
Strategic Withdrawals: While generally discouraged, some people strategically contribute smaller amounts each year, taking larger withdrawals when they experience a tax-advantaged event (e.g., a bonus or a loss in other investments) to minimize taxes. Consult with a financial advisor before implementing this strategy.

5. Start Early – Time is Your Greatest Asset

The power of compounding is significant. The earlier you start contributing to your 401(k), the more time your money has to grow. Even small, consistent contributions can make a huge difference over the long term.

Resources:

IRS 401(k) Information: https://www.irs.gov/retirement-plan-topics/401k-plans
Financial Health Website: https://www.investopedia.com/terms/4/401k-plan.asp

Disclaimer: This blog post is for informational purposes only and does not constitute financial advice. Consult with a qualified financial advisor before making any investment decisions.