With the huge shift to company-based 401(k) plans across most industries, the burden of saving for retirement falls on the retiree. It’s crucial to get your 401(k) in-line with your financial goals to have enough money for retirement. Here is a range of useful ideas you can use to maximize your 401(k) benefits to ensure good long-term financial health.
What is a 401(k)?
A 401(k) is a retirement savings plan sponsored by an employer, allowing employees to save and invest a piece of their paycheck before taxes are taken out. Taxes aren’t paid until the money is withdrawn from the account.
How to Maximize Your 401(k) Benefits
Invest in both Roth and traditional accounts
One of the best aspects of a 401(k) plan is the tax-advantage participants receive from their investments. The traditional 401(k) plan gives employees the opportunity to make pre-tax contributions to the plan — however, taxes will be applied if the participant withdraws from the account.
Roth 401(k) gives employees another tax-advantaged option: contributions are made with after-tax dollars, but withdrawals are fully tax-free as long as certain conditions are met. The Roth 401(k) option is available in more than 50 percent of company 401(k) plans.
The most successful participants choose to contribute to both types of accounts in order to diversify and maximize their investments, while gaining better tax advantages.
Understand annual 401(k) limits to maximize investments
In 2023, you can contribute an extra $2,000 to your 401(k). The government raised the contribution limit to $22,500 from $20,500 in 2022 ($30,000 if you are 50 or older).
Employer contributions are not included in your annual contribution limit. However, there is a combined contribution limit of $66,000 for the employer and employee contributions in 2023 (plus the $7,500 if older than 50). The employee compensation limit for calculating contributions is $330,000 for 2023.
Contribute to your retirement accounts automatically
While you may not enjoy taking a cut to your weekly paycheck, setting up automatic contributions will provide you with the most efficient means of saving for retirement. Plus, you won’t have to manually contribute on your own, and there is little temptation to spend the money because it never hits your personal bank account.
Don’t touch your 401(k) before you retire
While it may be tempting to dip into your expanding amount of money in your 401(k) — don’t touch it. Instead of splurging on a new car, jewelry or furniture, leave your funds where they are. If you decide to take money out of your 401(k), you’ll pay extra fees and taxes, while losing out on compound interest.
By leaving your 401(k) alone, your gains are reinvested and give you the opportunity to earn more than you would with a smaller amount of money. This lets your account grow exponentially year after year.
Be cautious of large fees
When you participate in a 401(k), you receive a statement from your employer or plan administrator that will detail your investments, performance, deductible expenses and the operating expenses for your investments. That will be followed by a second statement detailing which fees you racked up yourself—say, for setting up a loan.
Fees can dramatically alter how much money you’re able to save for retirement. Carefully analyze your statements when you receive them. This will give you a solid overview of how much money you’re losing in fees.
When you retire, don’t withdraw too much, too soon
When entering retirement, or considering the thought, don’t withdraw a lot of your 401(k) fund too soon. The rule of thumb is to take out four to five percent each year. That amount can be larger if you’re invested in other assets, as well as if you decide to retire later. For example, if you decide to retire at 70, your retirement will be shorter, so your withdrawal rate can be higher. Additionally, if you have a significant pension, or can work in retirement, have a part-time job, or own real estate and have rental income, you may be able to withdraw more.
Have more questions? We’d love to help!
Contact Trust Point today for all of your 401(k) needs. We’ve been serving clients with custom-tailored retirement plans for more than 100 years. Find out how we can help you meet your financial goals. Get in touch.