5 Ways to Maximize Your 401(k)

A 401(k) plan may not be your only choice when it comes to saving for retirement, but if your employer offers one, it pays to take advantage of it. Here are a few ways to make the most of your 401(k) so that it serves you well throughout your senior years.

1. Put in enough money to claim your full employer match

Most employers that offer a 401(k) plan also match employee contributions to different degrees. If you fail to take advantage of that match, you're effectively giving up free money, so instead, figure out how much money you need to contribute from your own earnings to snag your match in full. For example, if your employer will match you dollar for dollar for up to 5% of your salary, and you earn $60,000 a year, that means putting in $3,000 of your own money will give you another $3,000 -- the most you can get -- in return. Jar filled with coins and rolled-up bills that says 401K

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And remember, those matching contributions can add up over time. Say you score an extra $3,000 in your 401(k) every year for 30 years. If your investments in that plan generate an average annual 7% return, your matching dollars alone will give you an additional $283,000 for retirement.

2. Take advantage of catch-up contributions

Both 401(k)s and IRAs offer older savers the option to make catch-up contributions, but with 401(k)s, those catch-ups are more generous. Currently, you're limited to $19,500 in annual 401(k) contributions if you're under the age of 50, but if you're 50 or over, you get a $6,500 catch-up opportunity in your 401(k) that could bring your total annual contribution to $26,000. With an IRA, you're limited to just a $1,000 catch-up.

If you're able to make catch-up contributions in your 401(k), you'll have a solid opportunity to grow significant wealth for the future -- especially if you wind up saving in that employer plan for many years following the year you turn 50. In fact, putting in an extra $6,500 a year over 20 years will give you an additional $266,000, assuming that same 7% return on investment.

3. Avoid fees that eat away at your investment returns

The money you put into your 401(k) shouldn't just sit in cash; you should invest it so it grows into a larger sum. But be careful with the investments you choose. You'll generally be given the choice to load up on actively managed mutual funds, which come with higher fees, versus index funds, which are passively managed and come with substantially lower fees.

Index funds seek to match the performance of the indexes they follow; they don't seek to beat the market. However, they have a strong history of outperforming actively managed mutual funds, and given their lower fees, known as expense ratios, they could make a lot more sense for your 401(k).

4. Don't play it too safe

Investing your 401(k) too conservatively is a good way to stunt its growth. The 7% average annual return used in our examples above is based on a stock-focused investment mix, and if you're at least 10 years away from retirement, that's really the way to go. As you get closer to the tail end of your career, you can shift your 401(k) investments into safer alternatives, like bonds, but stocks are especially important when you're younger.

Keep in mind that when you first sign up for your 401(k), your plan might have your contributions filter into its default investment option -- which will most likely be a target-date fund. Target-date funds take a lot of the guesswork out of long-term investing, but they can also be somewhat conservative, so rather than settle for one, explore the choices offered by your plan.

5. Save in a Roth account

A growing number of 401(k)s are offering a Roth savings option. With a Roth account, you don't get a tax break on your contributions as you would with a traditional 401(k). But when the time comes to take withdrawals from a Roth 401(k), you get to enjoy that money completely tax-free, whereas with a traditional 401(k), you pay taxes on the distributions you take in retirement. Saving in a Roth is a good way to make your senior years easier -- even if it means giving up a more immediate tax break.

The choices you make with your 401(k) could set the stage for the retirement of your dreams. Do your best to maximize your retirement plan -- you'll be thankful for it when the time comes to leave your career behind.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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