If financial peace of mind in your retirement years, tax advantages, and free money sound good to you, then don’t wait another year before you start contributing to your 401(k). It may be one of the best fiscal decisions that you ever make.
Whether you are in your 20s or your 50s, if you haven’t started putting money away in your 401(k), then the best time to start is the present. Many people don't always realize that a 401(k) plan can be a major source of income to ensure a comfortable retirement. Here are six helpful ways to maximize your 401(k) growth:
- To most effectively grow your 401(k), pick as high of a percentage as you can afford to set aside, and automate regular contributions to it.
- Make sure you understand how your employer may or may not contribute to your 401(k) plan, and try to maximize those benefits.
- Minimize your tax burden by avoiding early withdrawals and honoring the required minimum distribution rules.
1. Contribute Automatically
Don’t wait until after you receive your paycheck to put money into your 401(k). Have the money automatically withdrawn from your income so you won’t have a chance to spend the contributions. Increase your contributions over the years as you earn more income.
2. Pick Your Own Saving Rate
The typical default saving rate for a 401(k) is about 3%. That amount doesn’t really guarantee a wealthy retirement, so take a look at your other options, and find a higher rate.
A 2019 survey by Deloitte shows that 3% is the most common default contribution rate to retirement accounts, followed by 6%, then 5%.
3. Look Into Employer Contributions
While most companies match a certain percentage to your 401(k), some may offer contributions based off of your income or a percentage of company profits. Weigh which scenario will save you the most money.
4. Defer Taxes
A traditional 401(k) will allow you to defer income tax payments on your deposited money until you actually withdraw from your account. Any investment growth on the account is also tax-free.
5. Choose Low-Cost Investments
Some investments in your 401(k) may have an expense ratio that actually detracts from your retirement account, so be sure to check your options, and find investments with the lowest cost.
6. Avoid Fees and Penalties
If you withdraw money from your 401(k) before you’re 59 1/2, you can be penalized up to 10 percent for the early withdrawal, in addition to applicable income tax. But don't wait too long: at age 72, you are required to take what is known as a "required minimum distribution" (RMD). If you fail to do so, you will be required to pay a 50% penalty (50% of the amount of the distribution).
Are you interested in more information on how your 401(k) can be a significant source of income in retirement? If so, contact a qualified financial advisor who can help you.