One of the best ways to build wealth, contribute to your financial security and potentially reduce your taxes is to max out the contributions you make to your 401k, or another retirement plan, before year end. Here's how...
What is a 401k?
401k plans are a type of retirement plan sponsored by an employer. Typically, they allow enrolled employees to defer up to $18,000 per year from their paycheck into an account designated for, and directed by, the employee. If the employee is over 50, they can contribute an additional $6,000, for a maximum total of $24,000.
Contribution limits change regularly, and are different for other retirement plans (like a SEP or SIMPLE). The best place to look up the current limit is on the official IRS website.
Make It Work For You
Whether using a traditional 401k plan, a Roth 401k plan, a SEP plan, a 457, a 401a or even a SIMPLE plan, the long term impact of tax deferral as well as compounding interest in a tax deferred account can make a tremendous difference in your long term financial success. In addition, many companies will match the first 3% to 5% of an employee's contribution. Making this a lucrative benefit.
Investing 101 tells us that maxing out these contributions wherever possible is a clear step in the right direction for most people.
When to Contribute
Ideally, you would be on track, from January of each year to max out your 401k contribution by the end of the year. In 2017, this contribution limit for people under 50 is $18,000. For those over 50 it is $24,000. This equates to $1,500 and $2,000 per month respectively. If you can’t afford to make this contribution each month, start with an amount that makes you feel comfortable, and try to increase it every quarter until you can max it out.
Remember that any matching contribution your employer makes does NOT reduce the amount that you can contribute.
It May Not Be Too Late
If you find yourself at the end of the year, with a long way to go, and can afford to defer your entire pay check (i.e. live off your savings for a month) it might make sense to reach out to your plan administrator and do so for the month of December. Not all plans will allow this.
If you can’t afford to contribute your entire paycheck, maybe consider increasing it now as a starting point for all of next year. Then review your contribution to try to hit your limit by increasing your savings at the beginning of each quarter (January, April, July, October).
For Best Results
Navigating retirement plans themselves, not to mention the investment choices, can be an arduous and complex process. In fact, it can often make investing so challenging that many people don't even try to do it, missing key financial opportunities. Enlisting the support of a professional can be particularly useful in this area.
After all, your life and financial goals are probably not to become an expert in ERISA regulation and retirement planning complexities. You're probably much more interested in saving enough money to one day be able to Live the Life You Love.
The photo above was taken just north of the Seven Mile Bridge in the Florida Keys. A place well suited to enjoying a lifetime of retirement savings.