Do you have a 401(k) retirement savings plan? According to the US Census Bureau, approximately 59% percent of Americans have access to one of the easiest ways to save for retirement. Yet, financial statistics indicate that only 32% of Americans invest in their 401(k). So, as we celebrate “National 401(k) Day,” let’s take a look at five strategies to maximize your 401(k).
1. If You’re Not Maximizing your 401(k), Start Now
A 401(k) retirement savings plan is one of the easiest ways to save for your retirement.
- Your contributions are made automatically from your paycheck throughout the year. In this way, you avoid the temptation to spend the money.
- Your contributions are tax-free, and all capital gains from the investments made by your 401(k) plan are tax-free. You’ll only need to pay taxes when you withdraw the funds during your retirement years.
- If your employer matches your contribution, your 401(k) becomes one of the most potent ways to boost your retirement savings.
2. Make Sure Your Monthly Contribution is High Enough to Qualify for an Employer Match
According to research, 25% of Americans fail to qualify for the employer match because their contributions are too low.
Your employer’s match is free money, so do everything you can to maximize your 401(k) contributions to reach the minimum threshold set by your employer.
3. Become 401(k) Financially Literate
Meet with your plan administrator or human resources staff to learn everything about how your 401(k) retirement savings plan works. For example, you might ask your administrator.
- How much do you need to contribute to qualify for an employer match?
- When do you become vested in the plan?
- What are your investment options? Can you change your investments to suit your needs?
- How much are the administration fees? If you can select your investment types, look for ones that have the lowest administration costs.
- Can you make an emergency withdrawal?
4. Remember to Increase Your Contributions
As your salary grows, maximize your monthly 401(k) contributions. You can increase your contributions by at least 1% every year until you reach the recommended goal of 15% of your income.
As you get older, your standard of living will increase. However, if you forget to raise your contributions, you might have a retirement account that doesn’t match your standard of living.
By the way, the 15% - 20% target includes your employer match, so don’t be intimidated by the goal. For example, suppose you contribute 6% of your salary each month to your 401(k) plan, and your employer matches with 6%. In that case, that’s 12% going to your retirement savings account.
If you’re not able to contribute enough to qualify for your employer’s match, no problem. In any event, try to increase your annual retirement contribution by 1% to 2% every year. An easy way to do this is to take your yearly raise and put it toward your 401(k) contribution.
5. Leave the Money in Your 401(k)
It might be tempting to borrow from your 401(k), but there are many reasons why you shouldn’t.
- The law requires that you repay your retirement savings account, plus interest.
- Until you repay the loan, you can’t make any contributions to your 401(k).
- If you withdraw early, you’ll need to pay taxes and a 10% early withdrawal penalty.
- Try to do everything you can to maximize your 401(k) retirement savings plan, even if you need to tighten your monthly budget.
- The standard annual contribution limit in 2021 is $19,500 (not including your employer match). If you’re over the age of 50, you can make a catch-up contribution of $6,500.
- If your company offers an employer match, take full advantage of it.