To max out or not to max out? That’s often the question that comes to people’s minds when contributing to their 401(k). However, the real question should be, how can I maximize my savings? We break down some of the strategies that will help you boost your 401(k) savings, whether or not that means hitting the contribution cap.
What are the limits for 2022?
If you’re under the age of 50 on an employer-designated plan, you’re able to contribute up to $20,500 in 2022, a thousand-dollar increase from last year’s limit. In addition to the standard $20,500 total contribution limit, people over the age of 50 are allowed $6,500 as a catch up contribution, meaning they can make a maximum contribution of $27,000 in 2022. These caps only include what you personally deposit into your 401(k) account, not any employer match you receive.
Tips for Maximizing Your 401k Savings
Don’t wait to save
The old adage “better late than never” is critical advice when it comes to saving for retirement. Whether or not you choose to hit the year’s limit, the only way to maximize your contributions is by acting now.
Take full advantage of your employer contributions
You need to contribute to your 401(k) no matter what, so why not receive free money when you do it? That’s essentially what happens when you contribute enough to receive your full company match. While some companies don’t offer matches, if they do, it’s one of the easiest and safest ways to boost your 401(k) savings.
Understand the tax implications
With traditional 401(k) plans, you’re able to deduct the contributions from that year’s tax return. What’s more, the dividends and capital gains that accumulate within your 401(k) aren’t subject to taxes until you begin making withdrawals. Under a Roth 401(k) plan, on the other hand, contributions are made with after-tax income, which means you’ll be able to make tax-free withdrawals in retirement.
Understanding the tax benefits is key to making the most of any 401(k) plan. If you have specific questions about yours, an expert wealth advisor is a valuable resource.
Diversify your assets
Using your 401(k) balance for one investment type could mean losing savings in the long run. Diversification helps you safeguard your balance while gaining returns from a mix of investments—as long as you’re ready to stick with your allocations for the long haul.
Minimize your fees
To run your 401(k), you need to pay two sets of bills: plan expenses and fund fees. While you can’t avoid the former, you do have control over the latter because they depend on the investments you choose. To maximize your savings, consider investing in funds that don’t have large management or sales charges, such as index funds. If you work with a wealth advisor, they can break down how different investment approaches might fit within your overall financial goals and retirement plans.
Consider a Backdoor 401(k)
Also known as the “Mega” Backdoor Roth, the backdoor 401(k) lets participants convert after-tax contributions made into the traditional 401(k) to a Roth IRA or a Roth 401(k) with little or possibly no tax liability. This strategy is most common among high-income earners as it allows them to create a long-term tax shelter for their investments. However, it’s important to note that many 401(k) plans don’t offer this conversion. Plus, this strategy involves many moving parts and, if not executed correctly, could result in large unexpected tax bills.
Get the Strategies That Work for You
Your financial situation is unique, which means the amount you contribute to your 401(k) will be too. Ironwood Wealth Management is here to help you understand the ins and outs of your individual plan, and then determine the best approach according to your larger financial goals. Connect with us today to learn more about what our comprehensive financial planning services can do for you.
