Your 401(k) is one of the most important financial decisions you will make. It offers tax breaks, brings employer contributions, and has great investment potential.
However, its biggest advantage is the level of financial security it offers after retirement. Most Americans have limited retirement savings that won’t allow them to lead a comfortable life. A great way to grow savings is to max out your 401 (k.)
Only 9% of people are able to max out their investment, according to a survey of 15.3 million plan participates conducted by Fidelity Investments. Here we discuss different strategies to help max out your 401 (k) and improve your savings.
1. Start Saving Slowly
Many people are intimidated by the thought of saving over a thousand dollars a month, which can make them hesitate while contributing towards their 401 (k). The best way to handle this is to start out slow and move upwards steadily.
Consistency is the key here because if you invest small amounts consistently, you will eventually have a substantial pool. You can then increase the contribution when your income improves.
2. Get The Tax Breaks
If you make tax-deferred contributions to the 401 (k), you’re allowed to write it off during income come tax time. The limit for 2019 is $19,000 so if you’re in the 24% tax bracket, it is possible to save upwards of $4,500.
This means you can defer payment for this tax until you withdraw from the account.
People who earn less than $32,000 can also qualify for saver’s credit, that can earn 10% to 50% of the 401 (k) contributions. This is has a contribution limit of $2,000 for individuals and $4,000 for couples.
The tax breaks and deferments can help reduce the financial burden and allow you to save a substantial amount every month.
3. Resetting the Contributions
The maximum limit on 401 (k) contributions has been raised by $500 in 2019, which means you can contribute around $41 more to the fund every month.
If you want to max out your 401 (k), it is important to reset automatic contributions to bridge the gap. As mentioned before, even small amounts can make a big difference in the long run.
If you intend to max out the fund, making adjustments whenever the upper limit of the fund contribution increases is necessary.
4. Pay the Employer’s Match
Many employers will contribute towards the 401 (k) during the employment period. If you can’t max out your 401 (k), aim to at least match your employer’s contribution.
If you choose this option, you’ll get around 50 cents for every dollar invested in the fund. This applies to a maximum of 6% of your salary.
This means you will be getting 50% returns on your investment, which is a lot of free money over the duration of your employment.
5. Roth 401(k) Is an Option
Roth 401 (k) is an after-tax option that can be used alongside regular 401(k). This allows you to withdraw money tax-free instead of paying the government a substantial chunk of the collected funds in tax.
You get the benefit of both worlds if you have traditional and Roth 401 (k). You can defer tax and pay a portion of the savings into the traditional fund and invest a portion in Roth after tax.
This will reduce the tax burden at the end and lighten the load during your employment as well.
6. Choose Low-Cost Funds
You will need to pay the fund fees no matter how well or poorly it performs. Your plan sponsor must send a detailed disclosure statement regarding the fees so it is possible to find a much cheaper alternative.
The money you save from the fees can be invested in the fund, which will improve your savings over a long term. Check if the fund provider offers any low-cost funds that meet your investment goals.
7. Redirect Raises and Bonuses
You can redirect a portion of the money from raises and bonuses to the fund instead of spending them all.
This will add to your retirement money pool and help avoid reckless spending. Many plans include automatic escalation, which increases the amount of money withheld over time.
8. Avoid Penalties
You have some obligations to meet in order to sustain the fund. Investor’s can’t withdraw money too soon or too late without incurring penalties. If investors withdraw before the age of 55, they face 10% penalty.
Investors that don’t take the distribution and pay the taxes before 70 ½ incur a 50% penalty. These penalties can make a significant dent your savings so it’s best to avoid them.
Experts recommend choosing direct debit instead of manual payments. You will be less tempted to skip paying money into the fund in such circumstances. Pay the maximum amount whenever you can to get the maximum benefits.