For many Americans, a 401(k) is a huge part of their financial strategy. That’s because, for a lot of folks, a 401(k) and Social Security will be their primary sources of retirement income. But many people don’t understand how to max their 401(k).
Let’s look at some of the ways you may be able to do exactly that.
Focus on tax breaks
In 2022, you can defer paying income taxes on as much as $20,500 that you dedicate to your 401(k). If you’re in the 24% tax bracket, doing so may reduce your tax bill by $4,920. Ultimately, income tax won’t be due on that money until you begin taking withdrawals.
Furthermore, individuals who earn less than $34,000 and couples that earn less than $68,000 in 2022, may also qualify for the saver’s credit, which is worth between 10% and 50% of 401(k) contributions up to
$2,000 for individuals and $4,000 for couples.
In 2022, the catch-up contribution is $6,500. Older workers may be able to defer paying income taxes on as much as $27,000 in a 401(k) account. Broken down, that means an employee who is 55 and in the 24% tax bracket who maxes out their 401(k) plan may be able to reduce their current tax bill by $6,480.
Taking advantage of catch-up contributions may help you increase your retirement account balance in the critical final years before retirement. You can also defer paying income taxes on catch-up contributions until you begin taking withdrawals from your account.
Re-set your automatic contribution
As many of you probably know, many 401(k) contributions are automatically taken out of your paycheck and funneled directly into a retirement account. In 2022, the 401(k) contribution limit jumped
$1,000 from the 2021 limit, so make sure you’ve adjusted what’s being withheld from your paycheck.
To fully max out your 401(k) this year, you’ll need to save about $1,708 a month, or about $854 out of your two monthly paychecks. And don’t forget that folks who are 50 and older can defer paying income tax on as much as $2,250 a month.
Get your 401(k) match
Even if you aren’t able to max out your 401(k), make it a goal to save at least enough to trigger your employer’s 401(k) match. For example, an employer match of 50 cents for every dollar you save in your 401(K) up to 6% of your pay, is a 50% return on your investment.
And a dollar-for-dollar match doubles your money! You don’t need to be a financial expert to know that there aren’t many opportunities out there to double your money.
Select low-cost funds
Selecting low-costs funds is another way you may be able to max out your 401(k). Each fund within your 401(k) plan may charge you numerous fees. No matter how your investments perform, 401(k) fees are taken out of your returns.
Your plan sponsor must send you 401(k) fee disclosure statements that spell out how much each fund within your 401(k) costs you to own it. Do a little homework to see if your 401(k) plan offers a less expensive fund that will still meet your needs and goals.
Make sure you’re paying close attention to your age when you start taking 401(k) withdrawals because there are penalties if you take money out of your 401(k) account either too soon or too late.
In many cases, you’ll be slapped with a 10% early withdrawal penalty if you take a 401(k) distribution before you’re 55. Additionally, there’s a 50% penalty if you neglect to take a required minimum distribution from your 401(k), as well as the subsequent income tax bill, every year after turning 72.
Advisory services offered through Successful Retirement Solutions, LLC, a Registered Investment Advisor in the State of California. Insurance products and services are offered through Successful Solutions, LLC, (License#: 0D73873) an affiliated company.
Successful Retirement Solutions, LLC and Successful Solutions, LLC are not affiliated with or endorsed by the Social Security Administration or any government agency.