Every year, on the first Friday in September, we celebrate 401(k) Day—a day dedicated to raising awareness about retirement savings and the benefits of utilizing 401(k) plans. Planning for retirement is crucial for financial security, and 401(k) plans offer an excellent way to save for the future. This blog post will provide insights into maximizing 401(k) contributions, understanding employer matching, and the long-term impact on financial security.
Maximizing 401(k) Contributions
Contributing the maximum amount to your 401(k) plan is one of the most effective ways to accelerate your retirement savings. Here are some tips to help you maximize your contributions:
Understand Contribution Limits: Stay informed about the annual contribution limits set by the IRS. As of 2024, the contribution limit is $23,000, with an additional $7,500 catch-up contribution for individuals aged 50 and older.* *More info
Automate Contributions: Set up automatic paycheck deductions to ensure consistent contributions each month. This automated approach helps you save consistently without the temptation to spend the money elsewhere.
Gradually Increase Contributions: If you’re unable to contribute the maximum amount immediately, start with a percentage of your salary and gradually increase it each year until you reach the maximum. This allows you to adjust to the changes in your take-home pay gradually.
Take Advantage of Salary Increases: Whenever you receive a raise or bonus, consider increasing your 401(k) contributions accordingly. This way, you can save more without affecting your current lifestyle.
Understanding Employer Matching
One of the significant advantages of 401(k) plans is employer matching contributions. Understanding how this works can greatly benefit your retirement savings. Follow these guidelines:
Know Your Employer’s Match Policy: Review your employer’s 401(k) plan to understand their matching policy. Your employer may match a percentage of your contributions, up to a certain limit. Take advantage of this “free money” by contributing enough to maximize the match.
Strive for the Full Match: Aim to contribute enough to receive the full employer match. Failing to do so means leaving potential retirement savings on the table. Consider it an additional part of your salary and utilize the full benefit.
Ensure Vesting Period Knowledge: Be aware of the vesting period, which is the length of time you must work for the company before gaining ownership rights over the employer’s contributions. If you leave before your vested, you may lose part of the employer’s contributions.
The Long-Term Impact on Financial Security
Contributing to a 401(k) plan and saving for retirement can have a significant long-term impact on your financial security. Here’s what you need to know:
Power of Compound Interest: By starting early and consistently contributing to your 401(k) plan, you give your investments more time to grow. Compound interest will work in your favor, allowing your savings to snowball over time.
Tax Advantages: Contributions to a traditional 401(k) plan are made with pre-tax dollars, reducing your taxable income for the year. This offers immediate tax advantages, allowing you to keep more of your money.
Retirement Lifestyle: Properly utilizing a 401(k) plan provides a nest egg, helping to ensure you can maintain your desired lifestyle during retirement. It helps to avoid relying solely on Social Security or other sources of income that might not be sufficient.
Flexibility and Portability: 401(k) plans often offer flexibility and portability when changing jobs. For example, you may be able to roll over your 401(k) into a new employer’s plan or an Individual Retirement Account (IRA) without incurring taxes or penalties or take a taxable distribution at a later date or in retirement.
Prioritize your retirement savings
On this 401(k) Day, make a commitment to your financial future. Maximize your contributions, take advantage of employer matches, and recognize the long-term impact of saving for retirement. By making informed decisions and prioritizing your retirement savings, you are pursuing a brighter and more prosperous future for yourself. We would love to help you. Reach out to a Keel Financial advisor today.
Disclosures
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for individualized tax advice. We suggest that you discuss your specific tax situation with a qualified tax advisor.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment Advice offered through Winthrop Wealth, a Registered Investment Advisor. Keel Financial Partners and Winthrop Wealth are separate entities from LPL Financial.
