5 Ways to Squeeze Every Last Penny Out of Your 401(k)
Tossing money into whatever your 401(k)'s default investment is will probably help grow your retirement savings, but it's not the most efficient investing strategy. If you want to speed up your journey to retirement, you need to know how to get the most out of your 401(k). Here are five tips to get you started.
1. Pay taxes when it makes sense
Employers are increasingly offering their employees the choice between a traditional 401(k) and a Roth 401(k). Contributions to a traditional 401(k) reduce your taxable income this year, but you pay taxes on your withdrawals in retirement. Roth 401(k) contributions don't earn you a tax break this year, but then you get tax-free withdrawals later on.
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It's usually to your advantage to delay taxes until retirement if you believe you'll be in a lower tax bracket then. But if not, a Roth 401(k) might save you more money compared to paying taxes on your contributions and earnings later.
Decide which makes the most sense for you and put the bulk of your money there. You can always split your funds between both types of accounts too, but you should favor the one you think will provide you the greatest tax advantages. Be careful not to exceed the annual contribution limits, though. Adults under 50 may contribute up to $19,500 to 401(k)s in 2021. This limit will rise by $1,000 for 2022.
2. Make catch-up contributions if you can
Adults 50 and older are permitted to contribute an extra $6,000 to their 401(k)s each year. This brings their annual contribution limit to $26,000 for 2021 and $27,000 for 2022.
If you weren't able to save as much as you'd like to when you were younger, catch-up contributions are a great way to get yourself back on track. You don't have to do anything special to take advantage of them. Just increase your contributions accordingly.
3. Choose low-cost investments
Most 401(k)s give you a choice between several mutual funds preselected by your employer. Each mutual fund charges an annual fee, known as an expense ratio. This is a percentage of your assets, so if you have $100 invested in a fund with a 1% expense ratio, you pay $1 to the fund manager every year.
That may not sound too bad -- until you realize that means you're giving away $10,000 per year if you have $1 million in your account. And that's on top of whatever fees your 401(k) provider charges for things like maintaining the website where you can access your account or keeping records for legal purposes.
Whenever possible, look for investments with an expense ratio under 1% so you don't give up as much money in fees every year. You can find this out by checking the prospectus for each mutual fund.
4. Claim your full employer match
Employees who qualify for a 401(k) match should make claiming it their top priority. This could be worth thousands of dollars per year, depending on your salary and the company's matching formula. But you only get this money if you contribute to your 401(k) first.
Talk to your HR department if you're unsure how your company's 401(k) match works or if you don't know how much of your match you've already claimed for the year. Then, try to increase your contributions so you can claim the full match before the end of the year. Think about how much you'll have to contribute per pay period next year, too, and start working toward your 2022 match right away.
5. Roll it over when you leave
If you're thinking about leaving your job, it usually makes sense to take your 401(k) with you when you do. Not only does this make it easier to manage your funds in one place, but it could also give you more investment choices, especially if you choose an IRA. This can help you reduce your fees and possibly grow your savings more quickly.
To do the rollover, you need an account where you intend to transfer the money to. This could be an IRA or a new 401(k). Then, you just have to tell your old 401(k) provider where you want the funds sent, and they'll do the transfer for you.
When you get the funds in your new retirement account, you should take some of the same steps discussed above to maximize your investment growth in that account. These tips may not all apply to you, but do your best to keep them in mind, as your circumstances may change over time. Be sure to stay abreast of any changes your employer or the government makes to your retirement plan as well, as this could affect your ability to save for the future.
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