A 401(k) plan is one of the best ways to save for retirement. Contributing enough to get any matching offered by your employer is a no-brainer, but maximizing your contributions beyond that can set you up for a comfortable retirement. Here are some tips to maximize your 401(k) contributions:
Increase your contribution rate whenever possible. Even increasing your contribution rate by 1% can make a big difference over time thanks to compounding returns. See if you can increase your rate by at least 1% each year or whenever you get a raise.
Take advantage of catch-up contributions if over 50. Those over age 50 can contribute an additional $6,500 to their 401(k) in 2020. That’s free money towards your retirement that you’ll want to grab if possible.
Consider making after-tax contributions. Some plans allow you to make non-Roth after-tax contributions in excess of the $19,500 (for 2020) pre-tax limit. These contributions can allow you to sock away even more in your 401(k) for retirement.
See if your plan allows in-service rollovers or distributions. Some plans allow you to withdraw after-tax contributions while still employed. You can then roll over those funds to a Roth IRA to avoid taxes on future growth. This essentially allows you to contribute more than the standard limits to your retirement accounts.
Contribute any bonuses or commissions. Whenever you receive any extra compensation from your job, increase your 401(k) contribution for that pay period to put that money straight into your retirement account. You’ve already budgeted without that money, so contributing it will help your nest egg without affecting your lifestyle.
Consider contributing any tax refunds. If you receive a large tax refund each year, put all or part of it towards increasing your 401(k) contributions. This allows you to build your retirement funds with money you’ve essentially already saved. You can adjust your withholdings to keep more in each paycheck instead if you prefer.
Ask if your employer offers a Roth 401(k) option. Some plans allow you to designate all or part of your contributions as Roth contributions. Roth 401(k)s offer tax-free growth and withdrawals in retirement. Contributing to both pre-tax and Roth options gives you more flexibility in retirement.
Meet with your financial advisor. If your situation allows, meeting with a financial advisor to develop a comprehensive retirement plan can help give you a roadmap to maximizing your 401(k) and achieving your retirement goals. They can help you determine the right asset allocation and ensure you take advantage of any additional opportunities to save.