Check your 401(k) Contributions: Are you Maxing Out?
October 5, 2020As the last quarter of the year is approaching, now is a great time to check in with your finances and make sure you are on track with your savings goals. With each calendar year, many of us have the opportunity to contribute to retirement plans through our employers.
Are you maxing out your retirement plan?
The 2020 employee contribution limits are $19,500. As an added bonus, if you are at least 50 years of age, you can contribute an extra $6,500 on top of this as part of an annual “catch-up contribution.” Your paystub should tell you your year-to-date contributions, so you can evaluate if you will have maxed out your contributions by the end of the year. If you have not, can you increase your contributions for the last quarter to do so?
In 2019, the contribution limit for anyone under 50 was $19,000. You want to make sure you have increased your contributions for the increase in maximum contribution if that was your intention.
Tips to max out
Some 401(k) plans allow you to deposit a year-end bonus directly into your account. That’s a great way to boost your retirement savings without cutting deeper into your regular paycheck, especially for small business owners.
There’s also a more immediate benefit to stashing more cash into your 401(k) plan before the end of the year. If you’re contributing on a pre-tax basis in 2021, you’re also lowering your 2021 taxable income. That means a smaller tax bill when you file your income tax return. Of course, if you’re saving on a pre-tax basis, you’ll pay taxes when you withdraw money from the account in retirement. If you want to avoid the tax in retirement and pay it now, you can contribute to a Roth 401(k) if your employer offers that option. Talk to your financial advisor near you to determine if you can benefit from taxes on NUA.
Why max out contributions?
Saving for retirement is so important. If you don’t have the ability within your cash flow to max out your contributions, can you increase your contributions at all? Any increase to your savings will have an impact, especially with the power of compounding interest. The earlier you can start saving the better, even for small business owners. See chart below for illustrative example on the power of compounding interest, and the benefits of saving as early as you can.
Investing $3,600/year ($300/mo) starting at age 25, 35 or 45 to age 65 at a 6% annual rate of return
Ok, I’ve maxed out my 401(k), now what?
If you have additional money, you may be able to save towards retirement with these other mechanisms:
Roth IRA
Traditional IRA
HSA
Contact an Experienced Financial Planner Near You
If you have any questions at all regarding your investments and elections, please don’t hesitate to reach out to Modera. We are happy to help.
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